Equity Optimism Amid Uncertainty: Navigating a Shifting Market Landscape

Despite a backdrop of economic and political uncertainties, leading market strategists on Bloomberg Surveillance express a cautiously optimistic outlook for equities, emphasizing a broadening bull market beyond US dominance and the enduring, albeit moderating, strength of technology. Investors are advised to look for value globally and appreciate the nuanced strengths of well-positioned companies, particularly those leveraging transformative trends like AI.

Key Insights

1. Global Equity Rebalancing: US to Normalize, Rest of World Poised for Gains

Attribution: Ben Laidler, Bradesco BBI

"I do think this bull market is sort of broadening out... I think the rest of the world now gets, now gets a bit of a look in. I think this is a healthy broadening."

Ben Laidler articulates a clear thesis that while he remains bullish on equities overall, the "juggernaut" performance of US equities is likely to moderate, paving the way for stronger returns in the "rest of the world" (ROW). He points out that the US market, representing 65% of global equities but only 25% of global GDP, has become a crowded trade. The recent sell-off served as a reminder of the risks associated with this concentration. In contrast, ROW markets offer a "double discount" – cheap currencies and cheap equity valuations – alongside positive policy catalysts like fiscal stimulus in China and Germany.

Laidler highlights Latin America (LATAM) as a particularly compelling region, noting it represents 7% of global GDP but only 70 basis points of global market capitalization. Brazil, he states, is "the cheapest market in the world" on various metrics, including an 8x P/E ratio, high dividend yields, and the highest real interest rates globally. With potential rate cuts on the horizon in Brazil, he anticipates a re-rating of multiples. Given that many international markets have been overlooked for 15 years and lack "tourist" investors, even a small reallocation of capital from the oversized US market could significantly impact these undervalued regions.

Actionable Takeaway: Investors should consider increasing their allocation to non-US equities, particularly in emerging markets like Brazil, where valuations are attractive and positive catalysts are emerging. The key is that a significant outperformance isn't needed for these markets to deliver strong returns, just a modest shift in sentiment or capital flows.

2. The Case for "Average" US Returns & Tech's Enduring, Albeit Tempered, Strength

Attribution: Ben Laidler, Bradesco BBI

"I'm looking for a more average US return from here... which feels terrible when we got used to 20, but, you know, it's actually fine."

While advocating for global diversification, Ben Laidler is not bearish on the US market. Instead, he forecasts a shift from extraordinary to "more average" returns, around 10%, which is historically strong but pales in comparison to the recent 20% annual gains many investors have become accustomed to. He believes current US valuations, around 21 times earnings, are justified by robust double-digit earnings growth, particularly from the tech sector. However, he finds it difficult to argue for significant multiple expansion from these levels, which are already above historical averages and make the US the most expensive market globally.

Regarding the dominant tech narrative, Laidler acknowledges its continued relevance. He notes that tech companies "are delivering the goods," citing earnings growth three times that of the broader S&P 500 in the last quarter. Despite higher multiples (25-30 times earnings for some), this earnings delivery makes a strong case for owning them. The crucial point is that while tech will likely remain a solid performer, the degree of outperformance seen in recent years may diminish, allowing other sectors and regions to "get a look in."

Actionable Takeaway: US investors should temper expectations for overall market returns and avoid betting against quality US tech companies that continue to deliver strong earnings. However, they should also recognize that the era of easy, outsized US market gains may be transitioning to a period of more moderate, earnings-driven growth, making a case for broader diversification.

3. Beyond the Hype: The Fundamental Strength and Optionality of Big Tech

Attribution: Charles Kantor, Neuberger Berman

"When you look at both their R&D spend and their capex spend on an annual basis, these seven companies [Magnificent Seven] spend north of 9% of their revenues on R&D which is north of $250 billion... lumped together, these seven companies have incredible optionality on the future."

Charles Kantor provides a compelling, fundamentals-based argument for the continued strength of many large-cap tech companies, often grouped as the "Magnificent Seven." He cautions against broad generalizations, emphasizing a company-by-company approach. The "magnificence" of these firms, he argues, is rooted in their massive and sustained investment in the future. Their collective annual R&D spend surpasses $250 billion (over 9% of their revenues), exceeding that of the entire healthcare and biotech sectors combined. Similarly, their capex, especially in recent years, has outstripped the combined investment of the materials, mining, and industrial sectors.

This enormous investment, Kantor explains, grants these companies "incredible optionality on the future" and has been achieved without over-leveraging their balance sheets—an astonishing feat. He notes that innovation and entrepreneurial spirit have historically driven the US economy, and these tech giants are at the forefront. While not all will succeed equally, and their investment strategies differ (e.g., Apple's capital-light approach versus Meta/Google's heavy capex), their scale and commitment to innovation are undeniable.

Actionable Takeaway: Investors should look beyond simplistic labels like "Mag 7" and analyze the underlying investment in R&D and capex when evaluating large tech companies. This commitment to innovation provides a strong foundation for future growth and justifies premium valuations for those executing effectively.

4. AI: A Transformative Force in Asset Management and Corporate Productivity

Attribution: Charles Kantor, Neuberger Berman

"I think within our industry, within asset management more broadly. I think it's going to have a profound impact 10 years from today. I think the way we think about how we crunch data will look fundamentally different."

Charles Kantor highlights Artificial Intelligence (AI) as a profoundly transformative technology, not just for specific sectors but for the asset management industry and broader corporate productivity. He reveals that Neuberger Berman is "using it aggressively... to think about how to make better decisions," and he personally finds it "massively productivity enhancing." The ability to process and analyze vast amounts of public data (due to Regulation Fair Disclosure) at unprecedented speeds is fundamentally changing investment research.

Beyond asset management, Kantor believes AI will contribute to a continued upward march of operating margins in the S&P 500. He refutes the long-held notion that margins have peaked, arguing that "operating margins can’t peak if you have great management teams running great businesses with innovation in a free market," with technology like AI being a key enabler of this ongoing efficiency and innovation. This productivity enhancement across various sectors is a critical long-term investment theme.

Actionable Takeaway: Investors should seek out companies that are not only developing AI but also effectively integrating it to enhance productivity and decision-making. The impact of AI will be widespread, potentially leading to sustained margin expansion and competitive advantages for early adopters across industries.

5. Political Headwinds & Tailwinds: Navigating Policy Uncertainty

Attribution: Henrietta Treyz, Veda Partners

"I think what the dynamic in L A does is it shifts the narrative away from Medicaid cuts, Medicare cuts, snap cuts, the deficit increases, and positions it squarely where there is going to be a concerted focus and new legislation this week from the United States Senate Judiciary Committee on exactly these immigration issues."

Henrietta Treyz sheds light on the "Uncertainty" aspect of the market, particularly stemming from the US political and policy landscape. She sees Hakeem Jeffries as "quite likely" to become the national leader of the Democratic Party. Looking ahead, she anticipates that if one party controls the presidency and both chambers of Congress, historical patterns suggest voters may opt for change in subsequent elections, potentially leading to shifts in power similar to 2018.

Regarding current policy, Treyz discusses the complex dynamics of immigration. She notes that President Trump's border policies were perceived by some Republican leaders as "too successful too quickly," leading the issue to recede from the spotlight. However, recent events, such as those in Los Angeles, are bringing immigration back to the forefront, providing an opening for the President to re-emphasize his actions and for new legislative efforts from the Senate Judiciary Committee. This renewed focus on immigration could also shift attention away from contentious fiscal issues like Medicaid cuts and deficit concerns, which are central to the upcoming tax and spending bill debates. Treyz expects this bill to pass in the last week of July, with the Senate Finance Committee handling the core tax and spending provisions.

Actionable Takeaway: Investors must remain attuned to the evolving political landscape, as policy decisions on immigration, fiscal spending, and taxation can have significant market and sectoral impacts. Understanding potential shifts in party control and legislative priorities is crucial for anticipating regulatory changes and economic policy direction.

Insightful Quotes

• Ben Laidler on global diversification: "The US is 65% of global equities, is 25% of global GDP... LATAM, 7% of of global GDP. It's 70 basis points of global market cap... I do think a little bit of love goes a very long way."
• Charles Kantor on the resilience of corporate America: "Operating margins can’t peak if you have great management teams running great businesses with with innovation in a free market."
• Ben Laidler on US market expectations: "US is fine, but it's what, you know, we're looking at a more average sort of 10% return, which feels terrible when we got used to 20, but, you know, it's actually fine."

Market Implications

The insights from Bloomberg Surveillance guests paint a picture of a market in transition, demanding a more nuanced and globally aware investment strategy. The "Equity Optimism" remains, but its sources are diversifying.

1. Strategic Shift to Global Equities: The strong consensus on the "broadening out" of the bull market, particularly Ben Laidler's conviction in undervalued ROW and emerging markets like Brazil, suggests investors should review their geographic allocations. The "double discount" in these regions, combined with potential policy tailwinds, presents a compelling risk-reward profile, especially as US returns are expected to normalize.
2. Quality and Earnings Focus in the US: While the US market may offer more "average" returns, it's not a call to abandon it. Instead, the focus should be on quality companies, especially in tech, that can deliver sustained earnings growth, as highlighted by both Laidler and Kantor. Charles Kantor's emphasis on R&D and capex as drivers of "optionality" for Big Tech reinforces the idea that fundamental strength, not just momentum, should guide US equity selection.
3. Leveraging Transformative Trends: Kantor's insights on AI underscore the importance of identifying and investing in long-term transformative trends. AI's potential to enhance productivity across sectors could be a significant driver of alpha and margin expansion for well-positioned companies.
4. Navigating Policy Volatility: Henrietta Treyz's analysis of the political climate serves as a reminder that policy uncertainty remains a key risk factor. Investors need to monitor developments in fiscal policy, regulation, and potential shifts in political power, as these can create both headwinds and opportunities for specific sectors and the broader market.

In essence, the path to generating returns in the current environment involves looking beyond recent trends, embracing global opportunities, focusing on fundamental quality and innovation in the US, and staying agile in the face of ongoing economic and political uncertainties.