Investors should diversify out of AI stocks: Strategist

markets are edging higher to kick off the second half of the year that is after an AI fueled rally in the first half driving 2third of market gains to discuss what we might see for the second half of this year we've got Jeffrey kleintop he's Charles Schwab's Chief Global investment strategist and managing director Jeffrey thanks so much for being here look I feel like we've had this question mark about consolidation and valuations for quite some time now at what point do you see that question mark becoming a real risk to this Market rally you know we've been fans of of AI and AI stocks for for quite a while now but we're we're tempering that enthusiasm actually looking to leadership from sectors like financials and energy and materials in the second half of the year you know a very unique thing happened in the second quarter that's only happened five times in the last 30 years and that's the indexes were up on average but the average stock was down for the S&P 500 the index was up 4.3% in Q2 but the average stock in the S&P 500 was down 2.8% and that was true around the world we could even see it in the all country World index from msci that was down the average stock was down 1.7% in Q2 even though the overall Benchmark itself was up 2.4 and you're right it's all about Ai and so that increasing concentration of performance in Q2 is something we have not seen in a long time so yes AI out perform for a while but it's the only thing seemingly outperforming in Q2 and I think the risks to the market in Q3 tied of that very narrow leadership ship suggest that investors should look for some diversification out of those handful of stocks when can investors know that it's the right time to begin taking profits in their AI trade well when they can see that there are opportunities elsewhere there are a number of other parts of the market that are much more attractively valued and of increasing earnings momentum you know one of the things that we've seen over the last four or five quarters is that AI stocks have driven almost all the earnings gains in fact the average stock has seen earnings losses in the last four quarters on a year-year growth basis that changes now we're actually starting to see here in the third quarter earnings even outside the US the earnings for the Euro 600 index or the Euro stock 600 index are expected to grow faster than those in the S&P 500 this quarter so you're finally starting to see earnings growth that exceeds that of the US uh exceeds that of the tech sector outside of that and I think that's the Turning Point here in terms of relative performance Jeffrey I also want to talk to you about what we're seeing in terms of global elections obvious viously following the news of marine leen's success overnight in France uh but also we are seeing this Global push towards more of a populist policy regime to what extent could that reverse some of the inflation progress that Global central banks have made given some of the policies that do come with populism it's a great point when we talk about widespread tariffs and it's not just the US that's talking about increasing tariffs Europe has talked about that Japan many countries Canada are focusing on that so when we have multiple barriers to trade and increasing tariffs around the world will that certainly does risk higher inflation also a Slowdown in the increasing momentum in manufacturing you know manufacturing was in recession last year we finally seen a recovery there that's helped lift economies like Germany's out of recession but the concern is that export growth then begins to weaken for manufactured firms so the recovery we've seen and that the uh the decline in inflation is at risk from populist policies we'll have to see how much they actually take root should these populists win uh France will be an interesting referendum on that of course we've had elections in India and Mexico where we did see populists win and stocks sold off 6% when they reopened uh it'll be very interesting to see what happens on Sunday and then of course on July 4th in the UK when we've got maybe the uh the the election going the other way towards the labor party you know Jeffrey as as we think about the back half of this year I mean it really does come back to what the pathway of inflation looks like where employment situation holds up in the dead in the um in the fed's Dual mandate here all that considered it's really just trying to price in when we see some interest rate cuts for the fed you know how are you looking through their calculus and what they've been signaling thus far we all year have been penciling in about two rate cuts from the Fed so we were uh way behind when the market was thinking there was going to be six and now we're thinking that uh you know we're a big ahead of the game as the Market's pondering whether there'll be any at all all I still think we're going to see the moderation and inflation necessary to get the FED to those one or two rate Cuts later this year uh that should begin to weaken the dollar which is something that should help International investors or or us-based investors investing internationally finally see some of those gains translated back into Dollars Japan's stock market's up like 18% this year but in dollars only about 6% so getting that stabilization in the currency could be really important in the second half Jeffrey Klein toop Charles Schwab Chief Global investment strategist and managing director Jeffrey always a pleasure to grab some time with you thanks for having me

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Length: 5min 3sec (303 seconds)

Published: Mon Jul 01 2024