'BEND BUT DON'T BREAK': Brian Belski explains why he still believes in this market

Key Concepts

• Earnings-Driven Market: The current market environment is primarily supported by corporate earnings growth rather than just speculative momentum.
• Market Rotation: The shift of capital from high-performing sectors (like the "Mega Seven") into broader market areas.
• Yield Curve Steepening: A financial condition where the spread between long-term and short-term interest rates increases, typically benefiting the financial sector.
• Private Credit: Non-bank lending that has seen significant growth; the speaker views its current volatility as a manageable risk rather than a systemic contagion.
• AI Infrastructure: The physical and software requirements for Artificial Intelligence, specifically focusing on power, data centers, and software integration.

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1. Market Outlook: "Bend but Not Break"

The speaker characterizes the current market as a "bend but not break" environment. Despite recent volatility and "growling" bears, the speaker argues that the market is resilient. He dismisses the notion of a systemic crash, noting that while there have been four major market concerns over the last 72 hours, the underlying fundamentals remain strong.

2. Addressing Macroeconomic Concerns

• Inflation: The speaker is not concerned about inflation "killing" the market. He notes that while 2020 saw a massive flood of money supply, the process of removing that liquidity takes time. He expects WTI (West Texas Intermediate) oil prices to decline, reducing inflationary pressure.
• Liquidity: Addressing fears that massive IPOs (like Google’s) or corporate fundraising will drain market liquidity, the speaker argues that private wealth is currently sitting on significant cash reserves. He rejects the "dumb money" theory, suggesting that private investors are well-positioned to deploy capital.
• Semiconductors & Tech: While semiconductors have risen 74% and represent 40% of the market, the speaker views this as a potential source of a correction. However, he clarifies that he is not "anti-tech," but rather "neutral" due to the sector's massive weight (over 30%) in the index, which makes it difficult to be significantly overweight.

3. Sector Strategy: Where to Invest

The speaker identifies three specific sectors where he is currently overweight:

• Financials: Driven by the expectation of a yield curve steepening, potential deregulation, and industry consolidation. He notes that while AI will impact financial services, human advisors remain essential for personal wealth management.
• Industrials: Positioned as an "AI play." The speaker emphasizes that AI requires physical infrastructure—powering data centers and electrical grid upgrades—which benefits the industrial sector.
• Communication Services: Specifically highlights Google as a leader in AI software, citing their advancements in TPU (Tensor Processing Unit) technology and their ability to raise $84 billion rapidly.

4. The Role of Earnings

The speaker argues that the market is currently "earnings-driven." He notes that many analysts failed to predict the current level of earnings growth. Even if a market correction occurs, he believes earnings growth will broaden out, moving beyond just the "Mega Seven" (the seven largest tech companies) to include other sectors that support the AI ecosystem.

5. Private Credit and Contagion

Regarding concerns about private credit, the speaker acknowledges the "rumblings" but argues that the negativity in private markets is actually a positive indicator. He suggests that the transparency and liquidity of the public marketplace act as a buffer, preventing private credit issues from escalating into a systemic contagion.

6. Geopolitical Impact and Small/Mid-Caps

The speaker suggests that the resolution of geopolitical conflicts (specifically mentioning Iran) could act as a catalyst for small and mid-cap stocks. He explains that a reduction in oil price volatility and a stabilization of the money supply could lead to a positive shift for these smaller companies within a 9-to-12-month timeframe.

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Synthesis and Conclusion

The core takeaway is that the market is currently in a transition phase from a tech-heavy, speculative environment to an earnings-driven, broader-based market. The speaker advocates for a strategic shift toward sectors that provide the "picks and shovels" for the AI revolution—specifically industrials for infrastructure and financials for interest-rate-sensitive growth. By maintaining a neutral stance on tech while being overweight in industrials and financials, the speaker positions his strategy to benefit from the broadening of earnings growth while mitigating the risks of a tech-led correction.