Richard Bernstein, a member of the Hall of Fame for institutional investors and founder and CEO of Richard Bernstein Advisors, said that the "leader" of the US stock market will experience a significant pullback, but this may provide a "huge" buying opportunity for almost all other sectors of the market.
Since last year, several large technology stocks such as Nvidia, Microsoft, Amazon, and Meta have performed exceptionally well and have become the main driving force behind the US stock market.
He pointed out that there is a difference between the bond market and the stock market, which may suggest that the market is about to adjust. In the bond market, credit spreads are narrowing, which is a common occurrence when corporate profits are growing. But now, only a small portion of stocks dominate the stock market, which means that the profits of most companies have not increased.
Of course, there are many things that can explain this disconnect, such as the bond market sending the wrong signal. However, Bernstein suggests that a more likely explanation is that the most expensive stocks in the market are overvalued and heading towards a correction, while the bond market suggests that other companies in the S&P 500 index are strengthening.
In the latest interview, he said, "The bond market shows that corporate profits will be very strong... But when there are only seven companies (leading the rise), the stock market says that this is a disastrous profit prospect. I think there is a foam in the stock market, and the bond market is right."
Moreover, the stock market has issued other warning signals, indicating that investors are too addicted to a few "leaders". According to Apollo's analysis, the top 10 stocks in the S&P 500 index account for 35% of the total market value of the index, the highest proportion on record.
However, Bernstein did not predict when the foam would burst, but warned that it might cause serious "damage" to the economy, and the loss of the stock market could be comparable to the bursting of the Internet foam. After the boom of Internet stocks, the Nasdaq Composite Index fell 78% from its peak, and technology stocks continued to struggle in the next 14 years.
Potential opportunities
On the other hand, for those investors who have diversified from the most expensive large technology stocks, the bursting of the foam is good news for their portfolios.
When large cap stocks plummeted in the first decade of this century, small cap stocks, energy stocks, and emerging market stocks performed very well. From 1999 to 2009, the Russell 2000 index rose by 48%, while the Morgan Stanley Capital International Emerging Markets Index surged by 145% during the same period.
Bernstein stated that his company is optimistic about everything, but not including the current "leaders" in the stock market, which have seen a surge in Wall Street's hype about artificial intelligence.
"We like everything except for 7 stocks. In fact, I think this may be the most diverse opportunity in my entire career. I think the opportunities here are huge," he said.