David Katz bullish on the second half of 2018 but sees ‘big wild card’

Volatility will continue in the second half of the year but the market should ultimately end higher, noted value investor David Katz told CNBC on Friday.

“The corporate tax cut is a windfall for companies and for the economy,” the chief investment officer at Matrix Asset Advisors said on “Power Lunch.”

He predicts the S&P 500 will end up 9 to 11 percent higher by year end.

However, there is a “big wild card” he’s concerned about: a possible trade war, which he called a “lose-lose proposition.”

The first half of the year was marked by volatility. In late January, the major indexes reached all-time highs but they then fell on concerns over rising interest rates. Strong earnings helped equities turn around, but then tensions over trade knocked stocks down again.

On Friday, the last day of trading for the first half, stocks traded higher but were still headed for weekly losses.

In fact, investors bailed out of U.S. stocks at a record pace in the last week, according to Bank of America Merrill Lynch.

Outflows from U.S. stock funds and ETFs totaled $24.2 billion, the third-highest ever and the highest since the February market correction, the bank said.

Katz said investors are worried about a trade war but pointed out that fundamentals are good.

“If you have a change in sentiment, that money that’s going out of the market can easily flow back,” he said. “It’s not going out because there’s structural problems with the market or that there are better places to put money.”

Eric Marshall, director of research and portfolio manager at Hodges Funds, says there are opportunities to be found regardless of what happens with trade.

“We’ve had quite a pullback here over the last couple weeks, and we think that really creates opportunities if you really know what you own and you really focus in on individual company fundamentals,” he said on “Power Lunch.”

He also anticipates the market will be higher by the end of the year, thanks to continued improvement in corporate earnings.

Marshall particularly likes recreation product manufacturer Brunswick, which he said has a lot of hidden value, and construction material maker Eagle Materials, which he likes for its strong earnings outlook.

Katz is bullish on financials and is hoping the latest Federal Reserve stress test results are the catalyst for a rally.

“This is a good environment for the banking group … yet the stocks are selling at very reasonable valuations,” he said.

Katz expects banks to be a leader and “a lot higher” six to 12 months from now.

He also says industrials should see a turnaround, but he’s still wary on utilities and real estate investment trusts. Technology still looks like a good place to be, he says, but he likes more modestly priced stocks over the high flyers.

His top stock picks are J.P. Morgan Chase, Eaton, Qualcomm and Schlumberger.

— CNBC’s Fred Imbert, Brenda Hentschel and Patti Domm contributed to this report.

Disclosures: Matrix clients and Katz own J.P. Morgan Chase, Eaton, Qualcomm and Schlumberger. Marshall owns Brunswick and Eagle Materials. Hodges Funds owns Brunswick and Eagle Materials directly or indirectly though its mutual funds.


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