As we approach the end of the first quarter, it is becoming more apparent that many impediments to higher equity prices are now firmly in the rear-view mirror – namely, inflation and the Federal Reserve. Both forces were significant headwinds for markets during the 2022-23 bear market – a time during which large global stock indexes declined approximately 30% and tech stocks plunged more than 40%. The Fed’s and other global central banks’ fight against inflation has been officially won, thankfully without harming global economies. Global economies – particularly in the US – have proven resilient. Historically, when the disequilibrium between the economy (high inflation) and markets is brought back in line, it heralds the start of a new business cycle and bull market – which we believe started in earnest in October of last year.

Watch James Demmert discuss the market on Bloomberg

James Demmert, Founder and Chief Investment Officer at Main Street Research, recently appeared on Bloomberg Radio with John Tucker and Molly Smith to discuss our market outlook. If you would prefer to watch a video, much of what we express in the below strategy update is in this video.

A New Business Cycle and Bull Market

Entering a new business cycle and bull market is distinguished by a few key elements, and this one is no exception:

• Economic fundamentals have returned to normal and are healthy
• Federal Reserve policy is no longer restrictive and is now ready to create easier financial conditions
• Corporations cease belt-tightening and begin to look towards re-investment and future growth
• Equity markets are reasonably priced

Why This Business Cycle is Unique and May Be Powerful

This new business cycle and bull market will likely be unusually powerful given the emergence of artificial intelligence (AI) and its effect on companies and the global economy. Though AI has been around for decades, the world never had enough processing power to make it robust enough to be a “game changer.” However, in recent years, companies like Nvidia have produced advanced chips to make AI work – think ChatGPT as one example. This technology is important for companies and economies because it enhances productivity growth. That term simply means doing more at a faster pace with fewer people and less infrastructure.

AI Creates a Supercycle for Global Economies and Stocks

AI can fuel a powerful “supercycle” for economies and certain companies by increasing productivity growth and profit margins. These types of technological transformations can have a profound effect on global growth and global equity prices. The last time the world experienced an equally important technological breakthrough was in the 1990s, with the emergence of the internet. For those who recall, that era was marked by unusually high economic and corporate productivity growth and a robust bull market. As we continue to understand further and experience the effect of AI, we can easily envision another supercycle developing and the benefits for economies, companies, and investors, and we look forward to helping you participate along the way.

Longer-term Market Targets for the New AI / Tech Led Bull Market – Dow 100k?

Our Founder and Chief Investment Officer, James Demmert, has written three books on market cycles and risk management. In his view, it is plausible that corporate earnings and market indexes could triple during this business cycle, which we envision will last 7-10 years. His forecast would suggest the Dow at 100k, the S&P 500 at 15k, and the Nasdaq at around 50k. Investors should focus on managing the cycle and the portfolio to optimize this significant tailwind while managing potential risks at the same time. Risk management requires adeptly investing in the right sectors and companies that can best leverage this bright future while protecting you from potential market “bubbles” or other unknown risks. Our team is excited and up to this task!

Sectors & Companies Most Likely to Benefit

The most obvious beneficiary of this new AI, tech-led bull market is the technology and communications sectors – the best-performing stocks since the bull market began in October 2023. However, as AI adapts to new use cases in other sectors and industries, we expect a wider breadth of stocks to start to have competitive performance – think healthcare, financials, industrial, and small capitalization stocks. Though our portfolio is overweight in tech and communications, we are not ignoring the many sectors trading at steep discounts to their intrinsic value, which will also greatly benefit the AI transformation.

Risk for Investors and Risks in a Supercycle – and How to Manage It

Supercycles don’t come around very often; when they do, we want to ensure you are fully invested while remaining aware of potential risks. In our view, investors should have a strategy to maximize wealth while managing the risk of catastrophic loss. This is where our Active Risk Management process comes in. Suppose markets were to head toward a more than-normal decline, perhaps based on geopolitics or some other “black swan” event. In that case, this process will reduce stock exposure to mitigate the decrease in your portfolio value. As you know, this includes our adjustment of your portfolio’s allocation to stocks, sector management, and using carefully placed stop loss orders.

The Continued Attractiveness of Fixed Income

It is a new and healthy era for fixed income. For the first time in over a dozen years, the bond market is providing a healthy yield. Going forward, interest rates will likely decline moderately, pushing bond prices and values upward. This decline is the primary reason it is critical to own individual bonds with “laddered” maturities to lock in these attractive rates. If you have outside cash in money markets or bond funds, you might consider speaking with your Main Street Research advisor to assist you in optimizing and enhancing the return of these assets.

Let’s Make Sure You Have a Wealth Plan, and it is well Structured for Dow 100k, Nasdaq 50k

If you haven’t yet taken advantage of our no-cost wealth planning offering, it is a service to consider as we enter this new business cycle. Though we are very optimistic, we understand there will be “bumps” along the way to our market targets. A well-defined financial plan can help to optimize your investment strategy while managing risk and providing peace of mind. Our great team of Certified Financial Planner™ professionals will assist you in this exercise. Please let us know if you would like to pursue this valuable service.

We hope this Strategy Update finds you and your family well. Please let us know if you have experienced any change in your financial situation or would like to discuss your portfolio.

Thanks again from all of us for your continued vote of confidence.

If you have a friend or family member who would benefit from our strategy and a no-cost portfolio review, feel free to share this Strategy Update or let us know.

Your Team at Main Street Research

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