Transcript
Caroline Woods
Joining us now is Brian Levitt, Chief Global Market Strategist at Invesco. Brian, great to have you back here.
Brian Levitt
Very nice to be here.
Caroline Woods
Thank you. All right. So we’re turning the page on the first half of the year. So tell us what’s the playbook for the second half. What’s changing. What’s staying the same.
Brian Levitt
So what’s changing? Well let’s start with the way we came into the year. Very nice expansion globally. Fed was going to lower interest rates. Oil costs were low. Rates were low is a very nice backdrop. We ran into the war in Iran which disrupted things, momentarily disrupted the broadening out trade. Confident now that we’ve seen oil prices come down significantly.
Brian Levitt
Inflation expectations down, rates down, that we’ve got a nice macro backdrop and the broadening of these markets should continue.
Caroline Woods
Yeah. The biggest story really so far has been this broadening that we’ve been seeing small caps having their best first half and decades. The Dow I think it’s the best first half in five years. Do you expect that to be kind of a temporary broadening or is that is this a new phase of the bull market?
Brian Levitt
I would categorize it as a new phase of the bull market. I mean we’ve always known that these parts of the market are cheaper. The question is, do you have a catalyst for them to outperform. And so those catalysts which are better growth globally. And some of that fiscal stimulus in most parts of the world, also declining energy prices is helpful.
Brian Levitt
You’d like to see some policies. I’m not sure we’re going to get all the way there with the fed, but I think if they stay on hold, that’s enough of a catalyst. And I think one of the things that people underestimate is you’ve seen a lot of building up of the companies that are bringing us a market, starting to think about some of the bigger beneficiaries of that smaller cap.
Brian Levitt
Companies can benefit from efficiencies. You know, financials, health care, these kind of sectors can can benefit from new innovations.
Caroline Woods
We’ve also been seeing a rotation within the AI opportunity though. If you take a look at the Mag 7 we have you know, they’re all underperforming for the most part. Maybe not Alphabet, the broader market. And we have names, you can’t talk individual stocks, but names like Micron, Intel Dell, SanDisk. You know running wild. So how are you thinking about the opportunity within technology as we head into the second half of the year.
Brian Levitt
Yeah. So we’ve gone from Mag to lag on the seven. Right. And you know what’s so nice about that. In 2024, all anybody wanted to talk about was how only seven stocks were dragging the stock market. And back then people would have loved for a broadening market. And back then, well, what if those names roll over. And at the time we said, you hope you’re in a better macro backdrop so that the rest of the market can carry it forward.
Brian Levitt
And so that’s precisely what’s happened. Investors are a bit skeptical on the amount of money being spent by the so-called hyperscalers. What type of return on invested capital do you get? So that’s now shifted to other parts of the tech sector, where supply may be constrained for a while to match up with all of this demand, very big moves in memory, very big moves in ships.
Brian Levitt
That may take a little bit of a breather. I don’t think we’re going to roll over substantially, but that’s a market that had a price in a substantial amount of new demand very quickly. And and that may moderate here.
Caroline Woods
So what part of the tech trade do you still like for the second half playbook.
Brian Levitt
Yeah, I for one I think that there’s been a significant wipe out of software businesses that may not disappear. And I’d say in many instances probably won’t disappear. I think a lot of them are going to start to harness their AI capabilities to, you know, to further improve. I think that there’s moats around those businesses. You incorporate AI and and things will improve.
Brian Levitt
But it’s not to say that, semiconductors won’t. That’s a long term structural story, right? So you may just have some fits and starts around that in terms of expectation around the investment build in terms of, you know, how long can this go on? Will they see return on invested capital. So chip companies memory companies could be a bit more volatile as expectations around that adjust.
Brian Levitt
But I continue to think that’s a longer term structural story, if not necessarily a second half of the year.
Caroline Woods
So for the everyday retail investor, how do they get their tech exposure? Is this just sitting in the S&P 500, or should they be putting their money in some thematic ETFs that give them exposure to specific parts or, you know, maybe a software ETF?
Brian Levitt
Yeah. So there’s different ways to do it. I mean, investors who have looked at how the S&P 500 has performed their how the QS have performed, they’ve done very well this year, even in a year where the tech rotation has changed. And so that’s okay. Very continue to be exposed to the QS and take advantage of that. If you want to be more specific in yeah, there certainly are ETFs or indices that you can gain exposure to.
Brian Levitt
Now some of them have run up a lot. If you look at the semiconductor index, if you look at, you know, new Dram ETF that came out, those have run a lot in a very short period of time. So look for places where there’s opportunities. I mean I, I suggest something like software. It’s been beaten up. And I think the negativity around that, it’s just gone too far.
Caroline Woods
Okay. You’ve also found been pretty bullish on the opportunity in emerging markets. Why are you still hanging your hat there.
Brian Levitt
Well you know it’s funny. The the story around em maybe changed a little bit from the beginning of the year. The beginning of the year was better global growth and lower, U.S. rates and a weaker dollar all historically benefit the emerging markets. The war in Iran disrupted the, and yet emerging markets continued to be a great performer.
Brian Levitt
But it was a great performer, not driven necessarily, by the way we thought about it from a macro perspective. It was driven more by a handful of names exposed to the memory trade at the top of those indices. So I think that story has gone on, you know, perhaps too far. But getting back to a better global growth environment, lower energy prices, perhaps a fed that could at some point normalize the yield curve, our expectations still for a weaker dollar.
Brian Levitt
All of that continues to be, in our opinion, tailwinds for em.
Caroline Woods
If the dollar continues to weaken. What’s the biggest investment implication for investors?
Brian Levitt
Historically, the the biggest outperform are in a period of a weaker dollar is emerging markets. And so that would be both on the equity and the bond side. And so that would be our view. And you know, the thing about it is investors have not experienced an environment where, you know, the fed can gradually lower interest rates over a long period of time.
Brian Levitt
And so if we get back to that moment, it’s a very big sea change from where we’ve been. And investors are used to either the fed gradually raising rates or lowering them to zero. And so can you get away from a strong dollar environment by gradually being bringing rates lower towards the rest of the world? That should be a nice, tailwind for capital to flow to other parts of the world.
Caroline Woods
So if you’re right about the continuation of this broadening and a weaker dollar and for investors to stay invested, what does the ideal playbook look like for the second half of the year? Yeah, I.
Brian Levitt
Would lean into what I would categorize as an expansion trade. And in an expansion trade, it’s a little bit different than your slowdown trade where you want to be higher quality mega cap. The growth of business is in more of an expansion trade. You want to look for where value exists and where that expansion can help break the breakout.
Brian Levitt
The value. So smaller capitals, small and mid-cap cyclical sectors within the equity market, non-U.S. exposure, in particular the emerging markets.
Caroline Woods
And then what about within the US?
Brian Levitt
Within the US, I would favor I would continue to favor the cyclical sectors. I mean, you know, when people get bearish here, I look at people getting bearish. And what are small caps at all time highs? Financials seem to be breaking out. Rates seem to be breaking out. That’s all representative of a reasonable macro backdrop or a market that expects a reasonable macro.
Caroline Woods
But is it too late to chase that momentum at this point? If I’m not an already invested in small caps, if I, you know, financials obviously still a lagging sector in the S&P 500 as you kind of look at the sector performance. But if I’m not reinvested there is there’s still room to.
Brian Levitt
Run I believe. So remember remember where valuations were at the starting point. We had a lot of catch up to do from small cap names to large cap names. And the reason you never had that is we just didn’t have a lot of growth supporting it. If you if you think of coming out of Covid, we had it.
Brian Levitt
And then we ran into inflation and policy tightening. So we we kind of clamped down on growth. And you never got that next catalyst. The catalyst here has been fiscal spin. A consumer that continues to do well. And, and we hope at some point an easing cycle or a continuation of it.
Caroline Woods
A lot of people, though, have been waiting for a pullback that we haven’t really seen come. So for those people who are sitting in cash right now and, you know, trying to fathom investing in a market that’s near all time highs, what’s your advice to them?
Brian Levitt
Yeah, it’s a challenge. And historically you’re better off investing at all time highs than you are on any random day. And so we all learn in this industry when we get into it, buy low and sell high. If you look at the charts of the broad market, in actuality it’s by high sell higher, right? That’s been the reality of it.
Brian Levitt
You have to ask yourself what drives a drawdown. They don’t come out of nowhere. They’re almost always the result of some type of policy uncertainty. And so in the last couple of years, we had Liberation Day, which gave us a 20% downturn or near 20%. And we had the war in Iran, which gave us, what, 8.5% down on the S&P 500.
Brian Levitt
So those were two big policy decisions that were disruptive. Now, since those moments, we got greater clarity on the tariff rates, and we’re creeping towards some type of memorandum of understanding and hopefully a greater clarity on with the war on Iran. The markets certainly believes that we’re heading there to greater clarity with the war on. So you only get it when big policy uncertainty emerges.
Brian Levitt
If we’re in a world where inflation expectations are contained, we have a divided government, all of which I believe will be where we are as we move through the fall into the beginning in next year. That should be less policy uncertainty.
Caroline Woods
But how much of your bullish outlook and the expansion trade hinges on a resolution in terms of the war in Iran? Because we keep thinking we’re getting closer and then we’re not.
Brian Levitt
The market has moved beyond it. Okay. And so oil prices peaked in early April without a full, you know, plan on where this is going. Inflation expectations peaked in early April. So the market has moved beyond that from the perspective of a it’s not meaningfully going to derail the major economies of the world. And B, it’s probably not going to change central bank policy all that significantly.
Brian Levitt
Now the ECB raise rates. We can debate that. I don’t think that was the right move. But it’s not going to meaningfully adjust those things. Look, if the Strait of Hormuz was to all of a sudden close and the market was expecting a prolonged closure of the Strait of Hormuz, and there was no way to move oil elsewhere, and oil goes back up above $110 a barrel, then, yeah, you may have another downturn in these markets.
Brian Levitt
Your leadership may shift towards higher quality growth of your businesses. But I’m going to stand to the belief that these markets are looking behind it. And I think ultimately the Trump administration is looking to move beyond it.
Caroline Woods
Even if that did happen, would you look at that as a buying opportunity?
Brian Levitt
I would I would look at it as a buying opportune. You have to think about how cycles and cycles and with over levered economies, too much excess and a fed that’s raising rates to kind of squash it all. And I don’t believe we’re particularly over levered, at least in the aggregate household balance sheets look good. Business balance sheets look generally good.
Caroline Woods
What is the biggest risk then at this point? Because it doesn’t seem to be the war in Iran or potentially rising oil prices. What do you think is the biggest risk to the market right now?
Brian Levitt
I’ve been focusing very closely on inflation. And, we knew where the headline CPI was going to go. That seemed pretty self-evident once gasoline prices rose and then core CPI will follow, that core PC will follow that. And so the question is, does the fed look through it, or does the fed feel the need to raise interest rates into it?
Brian Levitt
If you raise interest rates into it, or at least signaling, or you start to flatten the yield curve pretty significantly in many ways, you know where you look at where the ten year is. They’ve already gotten to a fairly restrictive place with regards to the shape of the yield curve. So if inflation were to accelerate here, that would be problematic.
Caroline Woods
What level are you looking for when you say accelerate?
Brian Levitt
Well, I would be concerned if I started to see a five year breakeven above 2.75% and meaning and climbing higher than that.
Caroline Woods
And if the fed does decide to hike rates to try to control inflation, would you turn bearish?
Brian Levitt
Well, the good news is right now the market is already pricing in a rate hike. Credit spreads have barely moved stock markets near an all time high. So no. If there was a reason why they had to start to tighten beyond that, yeah, that could start to become concerning.
Caroline Woods
Okay. All right. Perfect time to pivot to our rapid fire game of this or that. You’ve played you know the the rules here. Quick questions quick answers. Are you ready.
Brian Levitt
For I’m a former champion.
Caroline Woods
Yes you are. Here we go. Second half. Lean in or pull back. Lean in. Stay invested or raise cash.
Brian Levitt
Stay.
Caroline Woods
Invest the best place for new money right now.
Brian Levitt
Emerging markets.
Caroline Woods
Market broadening. Real shift or short lived?
Real shift.
Caroline Woods
Emerging markets or U.S. markets.
Brian Levitt
Emerging markets.
Caroline Woods
Equal weight or market cap.
Brian Levitt
Equal with.
Caroline Woods
Small caps or large cap.
Brian Levitt
Small caps.
Caroline Woods
More upside in the second half. The Dow or Nasdaq. Dow Russell or S&P 500.
Brian Levitt
Russell.
Caroline Woods
AI hardware or software?
Brian Levitt
Software.
Caroline Woods
Industrials or tech.
Brian Levitt
Industrials.
Caroline Woods
Staples or consumer discretionary.
Brian Levitt
Discretionary
Caroline Woods
Financials or health care.
Brian Levitt
Both financials.
Caroline Woods
Real estate or private credit.
Brian Levitt
Real estate.
Caroline Woods
Bigger risk. Geopolitics or inflation?
Brian Levitt
Inflation.
Caroline Woods
One word to describe the U.S. economy.
Brian Levitt
Resilient
Caroline Woods
Strait of Hormuz. Resolve by year end or ongoing risk?
Brian Levitt
Resolve.
Caroline Woods
Oil by year end. Higher or lower than 70.
Brian Levitt
Lower.
Caroline Woods
One word for the second half.
Brian Levitt
Productive.
Caroline Woods
S&P 500 price target by year end.
Brian Levitt
8000
Caroline Woods
Brian Levitt, the speediest this year I think that we’ve ever had. You certainly are the champion there. That’s Brian Levitt, Chief Global Market Strategist at Invesco. Thank you so much.
Brian Levitt
Thank you.
Caroline Woods
If you enjoyed this street talk, check out our full interview with Gareth Solloway. He explains why he expects and over 20% pullback for the S&P 500 by year end. He has a 5600 price target.