Dan Suzuki is deputy chief investment officer and chairman of the investment committee at Richard Bernstein Advisors, where he is responsible for portfolio strategy, asset allocation and investment management. For more on Kiplinger Personal Finance Magazine’s analysis on the rest of the year, read here.
Kiplinger: How do you see the second half of the year playing out?
Suzuki: Our base case is for stocks to trend higher until we see signs that earnings are beginning to peak. But there are a few major crosscurrents likely to affect a few parts of the market in different ways. Currently, earnings growth continues to accelerate.
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And critically, it is beginning to broaden — as you’re seeing the baton passed from U.S. mega-cap growth names to other areas of the market, you’ve already started to see performance broaden out. As long as that underlying dynamic persists, it’s very healthy for the market.
Which areas of the market will carry the baton from here?
Cheap cyclical sectors, meaning those most sensitive to economic growth. The sectors most likely to drive earnings acceleration from here include energy, industrials and materials. Also, earnings growth should be accelerating for smaller and midsize stocks, and for some areas outside the U.S. — in particular, emerging-markets stocks.
Emerging markets? Haven’t heard that in a long time.
They’re extremely cheap and out of favor, having underperformed for over a decade. Low valuation alone is not a good indicator of whether something is an opportunity, but it’s a nice support. Critically for emerging markets, we’re starting to see global economic growth reaccelerate, and that’s reflected in earnings for emerging-markets companies, which are beginning to accelerate more broadly. Also, upward pressure on inflation and commodity prices benefits EM profits. Broad exposure here makes sense — don’t get too caught up in any one country.
What’s your take on the U.S economy? Are rate cuts from the Federal Reserve off the table?
I wouldn’t say they’re off the table just yet, but they’re certainly rolling toward the edge. Economic growth is gaining momentum and broadening out, putting upward pressure on inflation and interest rates. We’re probably at the inflection point in the economic cycle, where better growth is no longer unequivocally good.
There’s a tug-of-war between the benefits for the market of stronger economic growth and stronger earnings and the negative impact of higher inflation, a tighter Fed and rising rates. Some companies will be the beneficiaries of that dynamic; some will be hurt by it.
Where should investors put their money now?
Opportunities for returns are generally greatest where the market is less crowded and capital is scarce. Today, U.S. mega-cap growth is where capital is concentrated and valuations are most extreme. The flip side, or the silver lining, is that has created capital scarcity in huge portions of the market. The story of the last 15 years has been all about U.S. mega-cap growth and disinflation. Some of the biggest opportunities now lie at the opposite end of the spectrum.
Rather than U.S. markets, there are more opportunities internationally. Rather than mega caps, there’s a bigger opportunity in small and mid caps. Rather than growth stocks, there’s more opportunity in cheaper value stocks. Lastly, rather than disinflation beneficiaries, the long-term opportunities lay more in inflation beneficiaries. In terms of U.S. stock sectors, we favor energy, industrials and materials.
We’ve heard about this rotation of market leadership before, but it has failed to stick.
There’s nothing new about that story today as opposed to a couple of years ago. A lot of people have been making the same or similar recommendations to buy a lot of these things, and they’ve continued to see these parts of the market underperform — that gets to the timing of when to own these things. The timing really has nothing to do with valuation or sentiment, it’s more a function of earnings fundamentals.
The good thing for most of these longer-term opportunities is that with earnings on the upswing, the near-term backdrop is also supportive. You just have to be careful about getting over your skis. At some point, when profit growth starts slowing, these areas won’t do as well.
What’s your earnings-growth forecast for the U.S. market overall?
Earnings forecasts are more about direction than decimal point for us. For this year, we’re expecting growth in the mid-teen percentages. But you want to be mindful for signs that earnings growth may be peaking — that would be the biggest risk to the market. There’s a lot of earnings momentum now, but as you get out two or three quarters from now, you could see a peak.
Will the U.S. election have an impact on markets?
Elections tend to have short-term impacts on market volatility, which makes sense. It’s something that market participants spend a lot of time focusing on as the polls shift and more policy discussions come out of the debates. Most of that is just noise, ultimately. What matters is whether there will be a sustained impact on corporate earnings through policies around fiscal stimulus and spending, or on taxes and tariffs. I don’t know that the ultimate policies are going to be as big as the rhetoric makes them out to be.
Are you worried about the geopolitical situation?
In isolation, the impact of geopolitical events tends to be short-lived. They can lead to big market swings, which tend to get washed out within six months or so. Clearly, if companies have more exposure to countries where tensions escalate, the more at risk those companies will be to regulation, taxes, tariffs and the like.
What else should investors be thinking about now?
I think in some ways we’re at the height of a de-diversification of portfolios. Every time we’ve had that historically, it hasn’t ended well for investors. They’re shunning diversification, arguably when they need it the most. Seven stocks make up 30% of the S&P 500. T
he U.S. market has gone from 40% of the global market to roughly 64% — a record. As a result, investors are really just making a bet on one part of the market where things are concentrated, both active managers who overweight the U.S and growth-focused parts of the market and index investors who have a passive concentration because that one part of the market has done so well. Instead, investors should be looking to add that diversification into their portfolio — geographically, from a company-size perspective and from a sector perspective.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
