Mike Rode

Analysing the growth scare: What investors should know

Markets have experienced volatility resulting from the Trump administration’s tariffs and the Department of Government Efficiency’s (DOGE’s) pruning of the federal government. Recent actions by the administration have slowed economic growth expectations and may contribute to a growth scare, which occurs when investors worry that weakness in one area of the market will spread to others.

The current scare comes after U.S. stocks climbed more than 25% in each of the last two calendar years. Enthusiasm for artificial intelligence (AI) and stocks benefiting from a momentum tailwind helped drive market gains in 2023 and 2024. Going into 2025, the S&P 500® Index had earnings metrics and high prices similar to those present during the tech bubble of the late 1990s and early 2000s.

As the pace of growth in AI-related spending slows and the earnings growth of the Magnificent Seven – a collection of large companies tied to technology and AI – decelerates from a scorching hot 30% year-over-year rate, we anticipate that investment will begin to flow to other areas of the market. This could include overlooked asset classes such as non-U.S. stocks and value-related industries like consumer staples and health care.

Is it time to consider overlooked asset classes?

The possibility of European fiscal stimulus has provided a spark to performance this year for European stocks, which have lagged in recent years. Given the valuation disparity between U.S. and non-U.S. equities, we think capital could continue to flow to European equities.

Within the U.S., small- and mid-cap stocks have significantly underperformed large-cap stocks for the last two years. Similarly, value stocks, dividend-payers and stocks less sensitive to market movements have lagged over the same period. These smaller and less volatile companies may present compelling opportunities, particularly when large companies are highly valued and decelerating.

Investors are becoming more price-sensitive

Recent market turmoil has already caused capital to flow to value, low-volatility and dividend stocks. We believe that this rotation could be long-lasting. Historically, when valuations for the S&P 500 reach extremely elevated levels, as they were at the end of 2024, price returns over the subsequent five to 10 years tend to be negative. We believe that environments like these can result in indices that track value stocks delivering strong returns.

We think of it this way: If a company’s stock price is already high relative to its profitability, investors are reluctant to bid the price even higher. Therefore, when a broad swath of the market is overpriced, we think less expensive value and dividend-paying stocks present opportunities. Currently, we think such stocks trade at attractive prices.

Certainly, near-term fears about slowing growth and a potential recession have spurred volatility for small- and mid-cap stocks due to their sensitivity to economic conditions. However, investors looking out further than three to six months may find an opportunity to consider these overlooked asset classes while the market is choppy.

But small- and mid-cap stocks have more going for them than what we see as attractive valuations. They could benefit from unique growth drivers such as deregulation, reshoring and the potential acceleration of mergers and acquisitions. As a result, we see potential for their earnings to improve this year, regardless of the economic backdrop.

Glimmers of hope amid the economic downturn

With recession risk rising, investors are expecting interest rate cuts this year, which could help in a couple of ways. Lower rates would help reduce the cost of refinancing the nation’s ever-growing fiscal debt. In addition, lower borrowing costs would be a relief to corporations and encourage some to invest in capital projects.

Another major potential positive is that lower mortgage rates could awaken a sleepy housing market where demand far outstrips supply. An improved housing sector could benefit small- and mid-caps, which have more exposure to housing-related industries than large-caps.

The current growth scare has accelerated the rotation away from Magnificent Seven and AI stocks that started in the second half of 2024 and into less flashy but historically more steady asset classes.

According to the CFA Institute, cycles that alternate between growth and value, or large-caps versus small-caps last nearly a decade on average. So, the market may be at the dawn of a multi-year run for unloved and overlooked asset classes.

In other words, we believe it’s a great time to be boring.

By Mike Rode, senior investment director

The post Is it time for less drama in your portfolio? appeared first on AdviserVoice.

Victor Zhang

FOMO, YOLO, HODL—whatever you call it, it appears the momentum factor took hold in the first quarter. The best-performing groups of stocks so far this year were related to bitcoin, high beta, obesity drugs and mega-cap technology. Optimism around artificial intelligence, progress on inflation as well as hopes for an economic soft landing and Fed rate cuts help explain the stock market rally. 

What’s next for the economy and the Fed? 

“Our best case for the next six months is economic slowdown and below-trend growth, which we have at about 80% probability.” Charles Tan, Co-Chief Investment Officer, Global Fixed Income

 After helping keep a recession at bay last year, consumers may be running out of steam. Our investment professionals expect consumer spending to tick down, the unemployment rate to inch up and the economy to cool off, which would allow the Fed to start cutting rates around the midyear—for a total of two to three cuts this year. Although recession is not the base case, it’s not beyond the realm of possibility later in the year or early next year. 

Lean into quality amid uncertainty

“In a slowdown of any magnitude, the way to go is quality, which means safety or caution.” Richard Weiss, Chief Investment Officer, Multi-Asset Strategies

Overall uncertainty is high given the economic, political and geopolitical backdrop. Unexpected events in any one of those arenas could ignite market volatility. Our investment professionals believe equity investors may want to shore up their defensive sector positions—ones that are typically stalwarts even in a slowdown or recession. 

In fixed income, bond yields in the high-quality space are at levels not seen in about 15 years. That means investors shouldn’t underestimate the roles high-quality Treasury, agency, mortgage-backed and corporate bond allocations may serve in portfolios.

Addressing a top-heavy stock market

“We still think there are long-term sustainable opportunities in U.S. large-cap [growth]. … That being said, there are plenty of other opportunities outside of that. Emerging markets and … small caps around the world are trading at valuations and prospects as if the world is already deep in a recession.” Victor Zhang, Chief Investment Officer, Senior Vice President

The top five stocks in the S&P 500^® Index represent around 25% of the index—the most concentrated in recent history. It’s been a remarkable period dominated by the results of a handful of the largest stocks.

It can be challenging to look at the performance of small-cap and emerging markets over the last 10 years compared to other larger and developed markets. However, it may be time to reconsider these areas for their diversification benefits—especially if the much-anticipated soft-landing scenario of broader growth occurs.

Emerging Markets equity outlook

“We’re actually very optimistic in the emerging markets. … Valuations are really attractive. But even more important than that is that we’re seeing an opportunity for growth to start reaccelerating again. We started seeing it in the later part of 2023 and now looking into 2024, 2025.” Patricia Ribeiro, Co-Chief Investment Officer, Global Growth Equity

The emerging markets equity team has a positive outlook for the asset class. Many countries in Latin America have made considerable progress in tempering inflation because their central banks aggressively hiked interest rates well before their counterparts in developed markets.

With inflation pressure easing, monetary policy easing has begun and has the potential to propel economic growth. The region also appears positioned to take advantage of concerns around global supply chains and U.S.-China trade tensions. Moreover, Mexico stands to benefit from its proximity to the U.S., competitive labor costs, demographics and established manufacturing base.

Elsewhere in emerging markets, India looks well positioned with resilient domestic demand anchoring growth amid an improved macroeconomic environment. In the team’s view, Saudi Arabia also has a compelling long-term thesis based on structural reform that differentiates it from other commodity-heavy markets.

Furthermore, small-cap companies globally and in emerging markets appear inexpensive while benefiting from a kind of once-in-a-generation trend of nearshoring or reshoring as countries that companies look to bring supply chains closer to their customers.

What about China?

“Everything that’s related to travel seems to be positive. But other than that, more cautious in China.” Patricia Ribeiro, Co-Chief Investment Officer, Global Growth Equity

China faces continuing challenges to economic growth from the property market downturn, subdued household spending and lingering deflationary pressures. Our investment professionals believe growth this year will depend on improving consumer confidence, income growth and policy support. They expect growth to be similar to last year, a view supported by government statements and actions.

Why active fixed income

“What we really want to do is invest in improving credits. … We have to do our active security selection, issuer selection—so we believe hands down in favor of active in the fixed-income world.” Charles Tan, Co-Chief Investment Officer, Global Fixed Income

Credit spreads, both high-yield and investment-grade, are approaching all-time tight levels, and reinvestment risk looms large. But bond yields in the high-quality space are some of the highest since the Great Financial Crisis, whether it’s Treasury bills, mortgage-backed securities or high-quality corporate bonds. So, from a credit quality perspective, our Global Fixed Income team prefers high quality over low quality. From a sector perspective, structured credit is compelling.

Furthermore, the yield curve is still inverted (the longest inversion in history). which means you get paid more staying in the front end than the back end. Combining all these three perspectives, yield curve, structures and credit quality, our team finds short-duration, high-quality income-types of strategies—where historically it might yield 6%-7% without taking on much credit or duration risk—attractive in this current market environment.

For benchmark- or liability-driven fixed-income investors, a duration overweight appears attractive. The 10-year yield may fall in the low 3%-range if the economy slows down like the Fed wants and inflation moderates over the next six to nine months. Whether inflation can eventually get to 2% is unclear—that’s the No. 1 question on many investors’ minds.

By Victor Zhang, Patricia Ribeiro, Charles Tan, Richard Weiss, Mike Rode

The post CIO roundtable: Is the market too optimistic? appeared first on AdviserVoice.