THE AI, TECH-LED BULL MARKET | May the Force of $6 Trillion be with you

There’s an adage on Wall Street: “Sell in May and go away,” and in our view, doing just the opposite may better serve investors. As we look out over the next few quarters and years, we envision that global equities are well positioned to outperform other asset classes — although we would expect most other asset classes also to exhibit healthy performance. In a world of so much worry around geopolitics, national debt, and elections, you may ask, “How can our team be bullish on stocks?” Let’s dig in and reveal some of the pillars of our bullish view.

The New AI Tech Led Business Cycle

After a crippling bout of inflation, an aggressive campaign of central bank rate hikes, and a 30- 40% decline in stock indexes in 2022-2023, we have arrived at a healthy economic equilibrium. Inflation has declined from nearly 10% to less than 3%, proving that the aggressive policy of raising interest rates works! Moreover, global economic growth has remained resilient and is now trending higher. Though short-term inflation data varies, we have a thoughtful and careful Federal Reserve committed to keeping this critical economic figure on the low end.

Federal Reserve and Global Central Bank Policy

It’s prudent to avoid “fighting the Fed” when making assumptions about the economy and stock market. Most investors learned this lesson again in 2022 when Fed rate hikes pummeled stocks. However, today’s Fed policy, which is similar to that of other central banks, is almost the opposite. They recognize that rate hikes are no longer necessary and are prepared to lower rates. Lowering rates can be highly stimulative for economic growth and global markets.

The New AI Tech-Led Bull Market

New business cycles give way to new bull markets, and we believe the current cycle will be no exception, as exemplified by the last few quarters of stock appreciation. It’s clear now that inflation has become normalized, as businesses and consumers have regained confidence and are reinvesting capital to spur future growth or, in the case of the consumer, spend on deferred expenses. This reinvigoration of confidence, investing, and spending gets the wheels of a business cycle started and gaining momentum. Most important for stock investors is that growing economies translate into growing corporate profitability, which is the primary driver of higher stock prices. Hence, business cycles coincide with bull markets. Remember that we are in the very early stages of this business cycle and bull market, which usually last 7-9 years!

The AI Effect and Powerful Tailwinds

Artificial Intelligence is already transforming economies and companies. We see this in corporate profit results and hear it in conference calls with some of the world’s top CEOs. As we recently heard from Jamie Dimon, the CEO of JP Morgan, AI is transforming the bank’s business. Transformational technological changes are rare but can be powerful tailwinds for business cycles and bull markets. In its simplest form, AI grants us the potential to be 2-3 times more productive with the same amount of human capital. This productivity growth leads to higher profit margins and stock prices. The last time we witnessed these phenomena was in the 1990s, during the birth of the internet, when stocks significantly outperformed all other asset classes. However, we believe that, unlike the 1990s tech bubble, this AI-led bull market is different because it is driving profitability.

Global Stocks are Reasonably Priced

Following the bear market of 2022-2023, investors remain cautious. This is evidenced by the more than $6 trillion in money markets — that, by fund mandate, should be invested in equity markets. Given that the average stock is trading at a price-to-earnings ratio of 15.5-16.5 and earnings are growing — stocks are inexpensive. Once investor confidence returns in full force, this $6 trillion in buying power will likely drive stocks higher.

Attractive Sectors

We strive to provide you with attractive portfolio performance, which is why we are diligent about your sector exposure. In an AI tech-led bull market, it is essential to own companies in the technology and telecommunication sectors as well as sectors that will benefit from the AI transformation, such as financials, healthcare, industrial, and energy companies.

National Debt, Elections and Geopolitics

They say bull markets “climb walls of worry,” and this one is no exception. The US national debt is worrisome and could negatively impact our country and global markets. One potential benefit of the new AI tech-led business cycle is that it may aid in easing these fears. The creation of the internet and resulting productivity growth sent corporate profits soaring along with corporate tax revenue. By the end of the 1990s, this, along with a balanced budget, put the US economy in a much healthier standing. Let’s hope AI does the same! Though elections cause lots of handwringing for investors, historically, they haven’t affected markets in any correlated fashion. However, some market sectors can react to potential election results, so we will watch this closely as the election season approaches. The current state of affairs regarding geopolitics is concerning and saddening. This turmoil can cause abnormal market volatility in specific sectors or even the whole market and possibly have longer-term detrimental effects on economies. For this reason, it is imperative we employ our Active Risk Management (ARM) process.

Active Risk Management

As you may know, we are very transparent about the fact that our craft comes with known and unknown risks. In cases where we are optimistic but our views do not come to fruition, it’s crucial that we manage risk through our Active Risk Management (ARM) process. This strategy is meant to mitigate catastrophic loss in one stock, a sector, or the portfolio as a whole. What it is not designed to do is avoid normal volatility. When necessary, ARM incorporates our flexibility to reduce your exposure to stocks significantly, rotate your sector exposures, and use carefully placed stop loss orders. We live in a complex world, and we believe every investor should incorporate at least some type of risk management to protect their long-term financial plan.

Fixed Income Markets Are Finally Healthy

It wasn’t easy to get fixed income markets healthy again, but the Federal Reserve’s aggressive rate hike campaign did the trick. If the bond market could ever be called exciting — it’s today! We believe a laddered portfolio of individual bonds emphasizing medium to long maturity bonds should serve investors particularly well this year. The next big move for rates is likely lower, which should give investors the benefit of the desirable current yield along with some future price appreciation.

We hope this update finds you well. If you have experienced any changes in your finances or have questions about your portfolio, please let us know.

Thanks for your continued confidence in our work.

Your Team At MSR

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