Market broadening is very healthy, says Richard Bernstein Advisors CEO Richard Bernstein

Key Concepts

• Market Broadening: The shift from concentration in a few large-cap stocks (Magnificent 7) to broader participation across the market.
• Nominal GDP: Gross Domestic Product measured in current prices, without adjusting for inflation.
• Macro Investing: An investment strategy focused on broad economic trends and factors rather than individual companies.
• Valuation Metrics: Price-to-Earnings (P/E) ratio used to assess the relative value of stocks.
• Non-U.S. Investments: Investing in equity markets outside of the United States.
• Dollar Appreciation/Depreciation: Changes in the value of the U.S. dollar relative to other currencies.
• Liquidity & Speculation: The availability of funds for investment and the resulting speculative trading activity.
• Fed Policy & Rate Cuts: Actions taken by the Federal Reserve to influence interest rates and the money supply.

Market Broadening and Economic Strength

Richard Bernstein emphasizes a significant broadening of the market since late October, which he views as a healthy development. He attributes this to the surprisingly strong U.S. economy, citing a nominal GDP growth exceeding 8% in the last quarter – a level not seen in 20 years (since 2006, excluding the post-pandemic rebound). He finds it “mind boggling” that the market remained narrow during such robust economic growth. This broadening indicates the market is beginning to recognize and price in the overall economic strength, and corporate profits are proving to be more resilient and widespread than previously anticipated.

The “Magnificent 7” and Valuation

Bernstein expresses a reluctance to analyze individual stocks, particularly within the “Magnificent 7” (Mag-7) group, stating his firm is “very much a macro firm” and doesn’t claim expertise in stock-picking. He acknowledges the Mag-7 companies are “fine companies” but stresses they are not “unique.” He argues that numerous companies globally exhibit similar or even faster growth rates at significantly lower valuations.

He illustrates this point with a hypothetical example: “If you can get 20% growth for 40 times earnings and 20% growth for 20 times earnings, why in the world would you not take the 20% growth for 20 times earnings?” This highlights his focus on value and the importance of considering price relative to growth. He notes Eli Lilly as an example of a company with 40% revenue growth and 40% operating margins, currently a $1 trillion company.

Opportunities in Non-U.S. Markets

Bernstein strongly advocates for increased investment in non-U.S. markets. He observes that while U.S. earnings growth is leveling off, profit cycles in many other parts of the world are accelerating. He points out that non-U.S. markets represent 35-40% of the global equity market, yet U.S. investors hold less than 10% of their portfolios in these markets. He believes simply increasing non-U.S. exposure, regardless of specific stock selection or weighting, would be a beneficial strategy. He states, “You just have to have non-U.S. and I think that will solve the problem.”

The Dollar’s Influence

Addressing concerns about the dollar’s potential appreciation, Bernstein downplays its impact on non-U.S. investments. He acknowledges that a stronger dollar would be a headwind, but argues it’s unlikely to negate the benefits of investing in appreciating currencies. He suggests that if the Federal Reserve continues on a rate-cutting course within a strong nominal GDP environment, the dollar is more likely to weaken.

Macro Narratives and Risk Factors

Bernstein addresses concerns about potential dollar debasement and a possible hawkish shift in Federal Reserve policy (referencing Jerome Warsh’s potential nomination). He acknowledges the possibility of a weaker dollar, suggesting investors can play this through commodities or, more effectively, non-U.S. stocks. He views the recent surge in cryptocurrency and the Mag-7 as driven by speculation fueled by liquidity. He warns that a more hawkish Fed stance could reduce liquidity, potentially “taking the punchbowl away from the party,” a reference to the historical analogy of the Fed removing stimulus and causing market corrections.

He considers several macro narratives “believable,” including a potential dollar weakening. He cautions against viewing dollar debasement as overly “hyperbolic” but acknowledges the possibility. He also highlights the importance of liquidity in driving speculative assets like crypto and the Mag-7.

Logical Connections

The discussion flows logically from an assessment of the current market broadening to an exploration of potential investment opportunities. Bernstein connects the strong economic data (nominal GDP) to the rationale for market broadening and then uses this as a springboard to discuss the relative valuations of U.S. versus non-U.S. equities. The conversation then addresses potential risks (dollar appreciation, Fed policy) and how they might impact the investment thesis. The entire discussion is framed by his firm’s macro-focused investment approach.

Notable Quote

“If you can get 20% growth for 40 times earnings and 20% growth for 20 times earnings, why in the world would you not take the 20% growth for 20 times earnings?” – Richard Bernstein, emphasizing the importance of valuation.

Conclusion

Richard Bernstein presents a bullish outlook on the market, driven by a broadening participation and underlying economic strength. He advocates for a macro-focused investment approach, emphasizing value and diversification. His key takeaway is that investors should consider increasing their exposure to non-U.S. markets to capitalize on accelerating earnings growth and benefit from potential dollar weakness. He cautions against overpaying for growth, particularly within the “Magnificent 7,” and highlights the importance of monitoring Federal Reserve policy and its impact on market liquidity.