Small caps forecasted to grow faster than Magnificent 7: Richard Bernstein

Everyone's talking about AI, but there might be more powerful forces moving the market. Here to explain is Richard Bernstein Advisors CEO, Richard Bernstein himself. Richard, thanks for coming by the show. Great job. Thank you. So conventional wisdom is that the only thing in the market right now is the artificial intelligence stocks, NVIDIA for the most part. But you say that's actually not where investors ought to be looking if they want to understand what really will be good over the next couple years. Yeah. I think, Jack, a much better theme is deglobalization. We this is kind of punching everybody in the face right now, and people haven't woken up. You know, we see what's going on in Eastern Europe. We see what's going on in the Middle East. We see what's going on in our relationship with China, Africa, Latin America. The world is changing. And, and that's important because globalization was huge in that it increased competition around the world, right? And we all know increasing competition puts downward pressure on prices. And so we had secular disinflation and secularly falling interest rates. But now the other side of that was the United States now runs a massive trade deficit, right, Because it was easier to produce abroad than it was in the United States, and cheaper and cheaper. So the way I think about this is everybody understands the national security implications of the United States being dependent on the rest of the world for semiconductors, but we don't seem to understand the national security implications of being dependent on the rest of the world for everything, for absolutely everything. And so this story is a story of the reindustrialization of the United States. You can call it near shoring, French shoring, reshoring infrastructure, anything you want to call it. It's all the exact same theme. And we think it's a very, very powerful force. OK, All of that said, for the stock investor, even looking at an index fund, right, NVIDIA, I think is 30% of this year's S&P returns. Throw in Microsoft, you're probably close to half of it. What would it take to change that dynamic? Well, Jack, I would said suggest that people look at the stock market as a seesaw. Right now, we've got like 7 stocks on one side or five or two on one side, and we have everything else in the global equity market on the other side of the seesaw. And the way I describe to people is, are there really only seven growth stories in the entire world? No, of course not. There's tons, and people are overlooking them. So I think if you're in an index fund, you're going to be very concentrated in those five or seven stocks. You're going to be missing the opportunities on the other side of that seesaw that I described. We think that's where the opportunity is. We think that that universe of opportunity is historically broad, almost a once in a generation opportunity. So nobody ever made money by buying what everybody else has been buying. And yet it's so painful to buy the stuff that everyone hates where the opportunities are. Absolutely. What would cause, you know, small stocks have been cheap or at least lagging for a long time. What would cause that to change? Well, they have been cheap, but I think the difference now is the fundamentals are starting to change. And if you look at analyst estimates for all the stocks around all the world, around the entire world, you'll find by the end of 24, beginning of 25, both small cap stocks and emerging market stocks are forecasted to grow faster than the Magnificent 7. To earnings growth to earnings growth, Absolutely. So we've now got a cheap set of stocks whose fundamentals are improving way more than people think. Wow. What would be other ways if I buy your globalization theme D globalization theme, which I do, what are other things to buy? What, what other sectors maybe would benefit from that? So I think the really big story is in small and mid sized industrial companies here in the United States. These are companies that have the, the the dominant part of their sales is focused domestically here in the United States. It's not like a big industrial selling to to China or India or something. These are U.S. companies selling to US customers and they're the heart and soul of this reindustrialization scene. Look, you're not going to light up a party telling people that you're buying a ball bearing company or a wire company or something like that. But that's really the the nuts and bolts of you will of this reindustrialization theme. What are the economic implications in the last 30 seconds of all this? It sounds to me as if this could be the opposite of globalization from a price perspective. It could be inflationary. Absolutely. I think look, the there we everybody knows that around the world now we're starting to get nationalistic tendencies. We could argue all day long, is that good or bad? Not my day job. I don't care. But nationalism is the opposite of globalization. And whereas globalization increased competition put downward pressure on prices, nationalization closes off competition and increases prices. It's one way or the other. Exactly. This is the trend. Thanks very much. Richard Bernstein, thanks for having me.