Fed rate hikes will pressure earnings, creating stock picker's market – Mohamed El-Erian

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Former PIMCO chief Mohamed El-Erian said Friday that the Federal Reserve’s campaign to increase interest rates will eventually weigh on corporate profits, creating a stock market that will be “about name selection.”

Speaking to CNBC, El-Erian also argued that the Fed let inflation pressures linger too long and has now put the economy at risk as it catches up to higher prices. This will begin to squeeze corporate profits soon, with the labor market possibly feeling the pinch next year.

“We don’t know yet the damage of the Fed being late,” the adviser to Allianz and Gramercy Funds said.

El-Erian predicted that the labor market will continue to show strength in the near term, given how robust it has been since the pandemic restrictions began to ease. He noted that this will give support to the economy, even as the Fed raises rates.

On the stock market, El-Erian characterized the latest bounce as a “relief rally” but said near-term performance will be dependent on an individual company’s ability to handle the current environment.

The former PIMCO chief advised investors to look for companies with pricing power. He didn’t provide specific suggestions but stated he saw “quite a few in tech and the real economy.”

“This is about name selection and about changing in your mind what are the key attributes for what’s ahead. And what’s ahead is inflation staying high but demand starting to weaken,” he said.

For more on stocks that could perform well in the current environment, see the 18 names offered by Jefferies as potential growth-at-a-reasonable-price plays.

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