Steven Blitz, chief US economist at the company, says market expectations that interest rate cuts may be on the horizon, further boosting equity market returns, are likely to be unfulfilled.
He said the latest US inflation data indicates that services inflation is not falling, making it difficult for policymakers to justify cutting rates at present.
Lower rates would typically be expected to help longer-duration and growth equities much more so than value stocks, but also smaller company stocks.
So if the market's expectations around the direction of rates were to permanently shift to a view that higher for longer is the new normal, then certain stocks would probably benefit more than others. But where is the value?
The 493
Excluding the large-cap tech stocks in the index, there are 493 other stocks in the large-cap benchmark.
Ninety One US equity investor Paul Vincent is among those to have been looking away from the mega caps. He says a central reason to invest in the big tech stocks is the capacity for those companies to grow, regardless of wider economic conditions.
But he says that with US GDP being as strong as it is, more companies have the ability to grow and so there can be more focus on valuation.
Vincent had previously invested in Nvidia, but sold it on the basis of valuation, noting: “There is an element of [artificial intelligence] being in a hype cycle right now, but otherwise I think the majority of those stocks are actually reasonably valued.”
Instead, he is focusing on the US consumer, and on stocks that are often called consumer staples. Those equities tend to be out of favour at a time when higher interest rates are pushing bond yields higher, he says.
This is because the income generated from those consumer staples is often viewed as being bond-like in nature, and so competes with the yield on bonds for capital.
If interest rates, and consequently bond yields, have peaked, then the yields on those types of equities may be viewed more attractively by the market.
Vincent says many of those types of stocks have been deeply out of favour with the market as rates rose, but a combination of the improved economic environment and the peak in rates may make those equities attractive now.
Smaller victories?
As mentioned earlier, lower interest rates and more positive economic news would be expected to benefit smaller companies, where liquidity and cyclicality are more relevant than among mid caps.
