I would stay long tech through areas like cybersecurity software: CIO Group's Wieting

Key Concepts

• Tech Sector Earnings: Double-digit growth in recent years, with expectations for continued but slowing revenue growth next year.
• Mature Bull Market: The S&P 500 trading at 27 times trailing earnings, indicating a mature phase.
• Economic Improvement: The economy is poised to improve in the coming year, with the rest of the economy expected to catch up to rapid growth in certain sectors.
• AI Infrastructure: Driving significant growth (42%), the most rapid since the invention of the personal computer.
• Broader Economy Lag: Construction has contracted, industrial production has grown only 1%, and manufacturing employment has stagnated.
• Consumer Spending: Has grown 3.5% as of mid-quarter 3Q.
• Business Caution: Evident in ISM reports, with 9 out of 10 industries concerned about tariffs.
• Credit Market Concerns: Easing credit standards are a concern as the recovery lengthens.
• Federal Reserve Policy: Market is pricing in an expectation of another Fed cut.
• Fed Balance Sheet Runoff: The Fed has managed its balance sheet runoff better than in 2019, cutting securities holdings by over $2 trillion.
• Labor Market: Slowing gains to a crawl.
• Corporate Profits: Expected to see more than 10% EPS growth in the coming year.
• Late 1990s Analogy: Used to describe the current market sentiment and potential for continued growth despite warnings.

Tech Sector Strength and Economic Outlook

Steven Whiting, CIO Group's chief investment strategist, discusses the continued strength of the tech sector, highlighting double-digit earnings growth over the past few years. While revenue growth is expected to continue next year, it is anticipated to slow down. Whiting draws an analogy to the late 1990s (specifically 1996-1998), a period marked by warnings of collapse that ultimately did not materialize. He characterizes the current market as a "mature bull market," with the S&P 500 trading at 27 times trailing earnings.

Despite this mature phase, Whiting believes the economy is poised for improvement in the coming year. He emphasizes that while the same high returns seen previously might not be replicated, next year's earnings and the year after will be crucial. Certain parts of the economy are experiencing rapid growth, and the rest of the economy has "room to improve and to catch up."

Drivers of Economic Improvement and AI's Role

The conversation delves into the drivers of this anticipated economic improvement. AI infrastructure is identified as a significant contributor, experiencing 42% growth, which Whiting describes as the "most rapid growth rate since the personal computer was invented."

However, the broader economy has been held back. Specific data points include:

• Construction: Has contracted.
• Industrial Production (US): Has grown only 1%.
• Manufacturing Employment: Has not increased since March.

In contrast, consumer spending has shown resilience, growing 3.5% as of mid-quarter 3Q. Whiting attributes some of the broader economic caution to factors like tariffs, noting that "nine out of 10 industries in the ISM report are really concerned about tariffs." He suggests that if macro policies, including trade, stabilize, producers will likely increase output to meet demand pace in the coming year.

Credit Market Concerns and Sentiment

The discussion addresses potential "cracks in the credit market." Whiting acknowledges that as a recovery lengthens, "issues of easing credit standards will matter." He specifically advises against investing in regional banks and the auto industry, citing ongoing issues in these sectors. However, he contextualizes concerns by stating that "a couple billion dollars of fraud is not exactly in indicative of what's happened across the entire economy."

Whiting reiterates that the widespread worry about these issues reflects sentiment, with many individuals remaining "on the sidelines and thinking that it's all over." This sentiment, he argues, mirrors the pattern observed in the late 1990s before the market became "really excessive."

Federal Reserve Policy and Balance Sheet Management

The Federal Reserve's current blackout period and market expectations for a Fed cut are examined. Whiting notes that historically, when the Fed cuts more than 100 basis points, it's "usually not good for the economy markets, the conditions that drive it," though he cites the mid-1990s as an exception.

He suggests that the market's focus is shifting to the labor market, which has seen "slowed gains to a crawl," and contrasts this with corporate profits, where "more than 10% EPS growth" is expected in the coming year. Whiting believes the market's direction doesn't "really depend on the Federal Reserve cutting." He argues that if the economy were truly faltering, it would be a negative regardless of Fed actions.

Regarding the Fed's balance sheet runoff, Whiting states that the Federal Reserve has managed it "better than it did in 2019." He points out that the Fed has "cut its securities holdings by over $2 trillion" and has been "a little bit lucky" that the economy is normalizing, despite higher inflation. He anticipates that inflation will decrease somewhat in the coming period.

Conclusion and Key Takeaways

The core takeaway is that despite the market being in a mature bull phase and facing some headwinds like business caution and credit market concerns, the underlying economic drivers, particularly AI infrastructure, are strong. The broader economy is expected to improve and catch up. While Fed policy and credit conditions are factors, the resilience of corporate earnings and the potential for economic normalization suggest continued growth, drawing parallels to the late 1990s. The Federal Reserve's improved balance sheet management is also seen as a positive.