The stock market is still doing great. Despite the anxiety among investors that the bull market has to end, and all the headwinds that can be pointed to that may cause a correction if not a bear market, 10 out of 11 sectors in the S&P 500 just beat earnings estimates.
That stat is among the reasons that Sam Huszczo, founder of SGH Wealth Management, is still in the bullish camp. Even the volatility in memory stocks and semiconductors this year isn’t keeping him from holding an optimistic view of the short-term market outlook. “Semiconductor stocks have revenue projections of 64% growth over the next year,” he said on this week’s “ETF Edge.”
“I’m optimistic for the next 12-18 months,” he added.
To be sure, the amount of money the hyperscalers are spending on data centers — and no longer spending on stock buybacks that help to prop up earnings — is a big change for the market and investors. It’s close to 40% of their revenue, according to Huszczo, and he said there is currently no guarantee the return on investment from AI ever arrives. That is why his most recent trade was into an equal-weight stock market fund, but he described it as “a place to have a cup of coffee,” in the current market as opposed to what he would consider a long-term investment.
Equal weight strategies are outperforming the market-weighted S&P 500. In the current moment, Huszczo says it is an approach that is a “little bit better on the risk dynamics” but still has exposure to the hyperscalers in the event that the “baton” should pass back to them. But his approach isn’t to make a single bet on which approach wins. At the same time that he has added an equal-weight allocation, he is investing in momentum stocks, and it is that “together” approach, he said, which will create a better winning formula. “No one strategy is going to be a silver bullet,” Huszczo said. The way he thinks about it is that his momentum trade is a way to get exposure to the future winners while his equal-weight trade is “trying to get out of yesterday’s winners.”
This index fund investing approach creates an uncorrelated portfolio (with momentum and equal weight having a negative 5.2% correlation, according to Huszczo). That means that no matter what happens in the broader market, “one is going to outperform the other,” he said. “We’re trying to get ahead of that, the second and third trade into the future,” he added. “Equal weight and dispersion of everything else will continue to be the trade.”
1-year performance of Invesco Equal Weight QQQ ETF.
For Victor Haghani, founder & CIO of Elm Wealth, which runs an ETF fund of funds investing in low-cost index options, the equities weighting is coming down. The standard target allocation for his fund of 75% equities and 25% fixed income is currently “a little underweight” equities, he said on “ETF Edge.”
Specifically, his ELM Market Navigator ETF (ELM) has 30% in U.S. stocks, 35% in non-U.S. stocks, and 35% in fixed income. The baseline allocation would include 45% in U.S. stocks.
Haghani said the slight overweight to non-U.S. equities is reflection of what research suggests long-term returns will be for U.S. stocks: “Pretty low relative to safety assets,” he said. “Not quite as extreme as in the 2000/2001 period, but the expected return of U.S. equities for the long run is close to what you get from treasuries,” he said.
He is more concerned than Huszczo based on the risk-return research he consults. “Right now, we are still in a low-risk environment. Momentum is positive. Implied volatility is constrained. But if we switch to a higher risk environment, it will be switching dramatically,” Haghani said. “We’re not that far away from being significant underweight equities,” he added.
What has Haghani concerned is not just the concentration in the S&P 500 that has led so many investors to equal weight strategies, but what he described as the “tremendous shift” in corporate activity from the trillions of dollars in stock buybacks by the biggest companies in the market to the mega-cap spending on data centers, which he thinks will contribute to greater selling pressure among investors in the future.
Haghani is also worried that too many investors follow Warren Buffett’s advice that having a portfolio which is 90% S&P 500 and 10% short-term treasuries is all that is required for market success. That’s because he says the advice was first provided by Buffett, as well as Vanguard Group founder Jack Bogle, decades ago when the valuation of the U.S. market was much closer to the valuation of overseas stocks. “When they said that, the P/E of U.S. equities was roughly the same as non-U.S. … Now it’s twice the P/E of non-U.S.,” he said.
Of course, that valuation gap has occurred because of the tremendous outperformance of the U.S. market, but at this point, three decades later, it makes Haghani more “sanguine” about non-U.S. stock markets. He stressed that if there is a major market correction, all global stocks will follow the chart down, but over a longer investing time horizon he does believe non-U.S. stocks should provide higher returns given the much better valuation outlook.
Neither professional investor said the problem for investors is holding index funds as a way to gain exposure to the market. Rather, it’s thinking that overall asset allocation should be passive. If you go back to foundational modern portfolio theory, Haghani said, the idea is to invest in a portfolio of risky assets within the market, but decide how much risk versus how much safety you want to have. “Passive stock investing makes sense,” he said, but he added it doesn’t continue to make sense when investors conflate it with an overall asset allocation approach. “Yet the most prevalent way people do asset allocation is a static choice.”
To hear more from these managers on how they are positioned in the current market, watch this week’s full “ETF Edge” show or listen to the podcast.
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