Here are the hidden risks and biggest opportunities on Wall Street

Transcript:
Caroline Woods: OK joining me now, Sonali Basak, Chief Investment Strategist at iCapital. Sonali great to have you.

Sonali Basak: Good to be here.

Caroline Woods: So Sonali, we're heading into a big earnings week. We have Tesla, Netflix, Coca-Cola among others. We'll also get CPI some long awaited data. What are you watching most closely. What's going to move the market this week?

Sonali Basak: Well, there are a few things. Earnings season has held up pretty strong. So far. We have been watching to see as a labor market continues to weaken, whether that there's a spillover effect into corporate America. Of course, we know it's those higher income consumers that are much higher proportion of spending. But spending has held up quite well. When we looked at earnings a week ago, we looked at companies that were exposed more to the economy, companies like ally that still showed resilience. So earnings have been holding up. Let's hope for the same this week. We're watching for earnings into next week in particular, given how big tech might perform, because big tech has certainly held up the market and large form. You look at even today as we start the week after a week of pretty tough sentiment a week ago, this week is held up also in part by big tech. You saw an upgrade to Apple buy and sell side firm here, and you do see it reaching a record high for the first time this year. This was a name in the Magnificent Seven that did not get a boost, in the same way that a lot of its rivals in the Magnificent Seven had throughout the course of the year. So given that it's more consumer heavy here, when you think about Apple and its ability to sell iPhones, promising signals that you're seeing some positive trading behind the name. Now, when we look at this week, also something interesting to think about with the CPI data at the end of the week, the CPI data is coming out because Social Security needs to have it for cost of living adjustments. Now we still don't get labor market data. And if the government is still shut down. But we will say this that not only is the September reading now difficult to parse through, the October reading might also have a lot of discrepancies, given that the reference week of last week for the survey has already come and gone. We've seen the government shutdown last longer than that point, so clarity around economic data will be a big theme heading well into next month. And there will be a push pull between the earnings story and the macro story as we continue to flush out what exactly is happening underneath the hood of this economy.

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Caroline Woods: OK so let's hone in on the macro side of things for just a second, because you've talked about it being this kind of K shaped slowdown. So uneven weakness. How weak does the economy ultimately get? And when does the K shaped slowdown show up in markets?

Sonali Basak: How weak does it get is a good question. I don't think anyone could answer that given that the economy is at a precipice at this moment. What I will say is, when you look at the labor market writ large, there are a few things going on. We're looking at farm payrolls to the extent that you can. Of course, at the current moment, you can't look at them given the government shutdown. But to the extent you can look at them, you have seen what is consistent with the low fire, low hire economy. That means you're not seeing companies really fire in mass. We're not seeing layoffs mounting to an alarming level. We are seeing the labor supply also slow, which is keeping the unemployment rate within a range. And we're believing now that if we continue to see job gains continue at the levels that we're seeing them at, you can continue to see them reach a break even pace here, where the unemployment rate is relatively stable. But you do see a hiring start to taper off a bit. But again, low, higher low fire. It's not an alarming level as of now.

With that said, we understand why investors could become more and more concerned. You looked at the most recent ADP data and you saw small and medium sized firms take the brunt of what you saw when it came to declines in the job market relative to the big firms that were still hiring. So certainly, you're seeing that k-shaped play out when it comes to the aggregate data in many forms. But is it also playing out in earnings. Going back to what we said about the financials, you're seeing parts of the lending economy focused on the more sensitive consumer also hold up. You're seeing spending trends hold up. And so has it impacted the aggregate economy. No not yet is the short answer. But does that mean you're not going to feel that pain on a day to day basis. Of course you are. Because you are seeing the firing rates in those small and medium sized firms at a greater level than you are at the biggest.

We did see some recent stress, though, among some of the regional Lenders last week. How contained do you think those issues are, or is that something we have to continue to be worried about. We're watching, but I would say that a lot of people are talking about this as though it's an SVB type moment. And there are a few reasons that we believe that it's not. One is that there are very contained losses here. When you look at the regional banks that have reported exposure, in fact, one of them even kept their guidance stable to higher for the rest of the year. It hasn't always impacted earnings per share and profitability, profitability for one. And it hasn't actually impacted aggregate loan losses to this large degree.

Now, another reason that we believe that this is quite contained is if you look back at what was happening during Silicon Valley Bank, importantly, you saw a lot of investor fear that was sustained. What you saw last week was regional banks that were reporting exposure to two companies facing bankruptcy. Here, what you saw was an equity sell off for a day and a marginal jump back the next day. And in fact, the bonds did not take a big hit for those banks. In fact, you saw maybe a marginal hit to the bonds, but actually the longer term bonds of these companies trading above par. So that is still quite a healthy signal. When we looked at the universe of business development corporations that were publicly traded and private, we had also seen very limited exposures to these two names first brands and tricolor. And so right now, there's no reason to believe that this is a widespread issue. Jamie Dimon believes that you could see more cockroaches. Might you see more issues. Maybe but that doesn't mean that it's creating a longer term systemic risk among these Lenders, both public and private.

Caroline Woods: OK, so despite credit jitters and missing data and trade uncertainty and a government shutdown, the S&P 500 is still trading at less than 1% away from all time highs. So what's the single most underappreciated risk you see on Wall Street right now?

Sonali Basak: You know, it's interesting. All year long there have been a lot of investment managers who have really missed this rally. And the question is, can we go higher from here now that we are back to that 6700 level and coming into this week, remember we remember, we were below that. There was a fair amount of negative energy out there. Given these worries about the credit cycle, we believe heading into next year that there is more upside to the equity market. We also are asking ourselves a lot about whether the credit cycle can decouple from what you're seeing in equity markets. Given that so much of the strength in equity markets has been driven by real earnings, I think that's the important point to remember here that earnings have remained very resilient. And the question is, do valuations support continued upside this year certainly into next year. There are a lot of forces that can give you sustained activity in the markets here.

Remember at this current moment it's kind of interesting right. Because with the government shutdown, some of the exuberance you're seeing in capital markets, things like IPOs, M&A, they're perhaps delayed. But we consider it just that delayed that into 2026. You can start to see that pipeline build and come back, particularly if you see volatility relatively low. Yes we did see a spike last week. We have come back down to 20 or below on the VIX. But if you can see this kind of moderate volatility environment and strong earnings and sustained valuations, you can still see a comeback in that capital markets activity. And certainly valuation sustained at these levels. When we look at where fair value could be for the S&P 500 next year, you're looking at above 7200 on 2027 earnings of 344, at actually a price to earnings of 21 times forward expected earnings. So that's less than where we are today. And so you could see valuation compression as long as earnings still grow. And an S&P 500 that is still higher. Now will you see all pockets of the market keep that strength. We've seen such a bid in small caps throughout the course of the summer. A lot of those companies are unprofitable. And we're trading on the prospect of interest rate cuts that were already baked in. Those interest rate cuts are certainly baked into the market right now. I think there's a question there. But in aggregate levels here, we are still seeing earnings growth and in fact, many parts of the markets, like financials, are still starting to hold up really strong.

Caroline Woods: OK so just building on that quickly, what is the best investment strategy then heading into year end, expecting that this is a market that continues to charge higher. Where do you want to be?What do you want to avoid?

Sonali Basak: We've been looking at financials and industrials throughout the latter part of this year, because they have not seen the same type of valuation run up that you've seen in the big tech names. But you have seen an ability there for a significant amount of catch up and earnings. The earnings per share has been outpacing consensus estimations in the early part of this earnings cycle, for example. So you are seeing really encouraging signs there. And that is without by the way, seeing the bulk of deregulation that can meet the sector. So you are seeing significant promise in financials.

We also see a lot of investor interest when it comes to different parts of the private markets. It's really important here. Infrastructure has been a really large play, particularly because infrastructure tends to do well in moderate and even high inflation environments. So people who might be considering what it means to remain in inflation, that is above the Fed's target and infrastructure looks quite good here. And that's not just the build out. That's also your traditional way roads, bridges, and dams. When people are thinking about private credit, they're looking to different areas of private credit, things that might be more secure, less economically sensitive areas of private credit, closer to investment grade assets with less credit risk. There are a lot of places to look in this environment, and especially in an environment that for the better part of the year, you've seen a one way trade. There is a lot to look at that has not caught up in terms of valuation. And those are a few areas.

Caroline Woods: OK we'll leave it there. Appreciate your picks and your insights. Sonali Basak, Chief Investment Officer at iCapital. Thank you so much.

This story was originally reported by TheStreet on Oct 22, 2025, where it first appeared in the Video section. Add TheStreet as a Preferred Source by clicking here.

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