Play Video One of Wall Street’s biggest bulls warns investors are underestimating inflation
Blackstone is predicting a market surge that could take out its S&P 500 year-end target earlier than expected.
According to the firm's investment strategist Joseph Zidle on CNBC's "Futures Now," there's a high probability the index will break through 3000 within the next couple of months.
"What we have left for the rest of the year, I think, is going to be bullish with higher highs," said Zidle last Thursday. "Believe it or not, the best equity performance actually comes after a midterm election."
He also saw third and fourth quarter earnings as a positive catalyst for stocks.
But Zidle warned this year's strong numbers could emerge as a serious headwind next year in the form of inflation, and a 10-Year Treasury Note yield going as high as 3.50 percent over the next six to 12 months.
"My view is that there's more inflation out there than people are pricing in. Inflation is not strong, but it is very widespread. You can see it in oil and gas markets. You can see it in input prices," said Zidle.
In a special note to CNBC he wrote, "The tax cuts provided a boost to [earnings per share] this year that will make next year's EPS growth look like it's slowing to single digits. Profit margins will likely roll over as well due to higher input costs."
Stuck in the wrong trade?
Zidle said investors are behaving as if falling prices, such as those the economy saw from 2009 to 2016, are still gripping the market. He cited robust fund flows into fixed income as evidence that investors are turning away from U.S. equity mutual and U.S. equity exchange-traded funds (ETFs).
Bank of America-Merrill Lynch's latest data shows U.S. equity mutual and ETF funds combined have seen $5.2 billion in inflows so far this year. Meanwhile, global bond funds have grabbed $66.5 billion in new funds.
He contended that strategy could be very detrimental for investor gains. In inflationary environments, Zidle said stocks typically beat bonds.
"It's a story of investors remaining scared of U.S. equity markets when in fact I think they need to be positioned the exact opposite way because the fundamentals here are strong. Corporate balance sheets are good and earnings are improving," added Zidle.
He's advising clients to focus on cyclical stocks with pricing power in this environment. His favorite groups are energy, materials and industrials.
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