The market is bifurcated between Mag 7 and 'everything else,' says Richard Bernstein

While markets are hitting new record highs, my next guest says the Fed's 2% inflation goal won't be met without an extended period of subpar growth. And he's noticing an odd divergent between the performance of large, small, large, small stocks and quality to junk bonds. And he says it could be a major warning sign. Joining me to explain is Richard Bernstein. He's CEO and chief investment officer of Richard Bernstein Advisors. It's great to have you here. And, and, and is this a change in tune, Richard? Normally when we talk you, you sort of reassure me that everything's going to be all right, right? Well, Kelly, I think the, the question is not whether one's bullish or bearish. I think it's bullish or bearish on what? And you know, we're basically very cautious on 7 names, the seven names that everybody knows, the seven names that are distorting all the indices, as you just pointed out. But realistically, we're pretty bullish on everything else in the world. And I think that's really the dichotomy. I think everybody knows we have a bifurcated market. It's hard to believe that the opportunities outside of maybe the next 10 minutes are in every are are in that seven, that Group of seven companies, right? Everybody knows about them. They're being they're flush with capital, there's no surprises. But yet the other side of that seesaw, if you will, is historically broad and historically undervalued and their fundamentals are improving and nobody cares. So you, you, I'm so glad this is, I'm just so glad we're having this discussion. OK. So some might say, and if you look at the first quarter, David Costin highlighted over the weekend as well, the Big 5 earnings growth, exclude Apple, their earnings growth was 84% year on year in Q1. The rest, the median SP500 earnings growth was 5%. Which would you rather own? I want the 84%. So it's interesting to hear you say, listen, the leadership is too narrow and you should look to everything else. And I'm thinking, I think everything else looks pretty bad right now and I'd rather stick with what is showing this phenomenal growth exactly. I mean, that's that's what the common thought is that we want these fast growers. But the reality is if you look at analysts forecast those growth rates in the magnificent five or seven or two, whatever you want to call them, are supposed to slow pretty dramatically as you go through the year. Meanwhile, if you look at small cap earnings expectations or emerging market earnings expectations, by the end of this year, both small caps and emerging markets are forecasted to grow faster than the Magnificent 7 earnings growth. So it's a matter of relative earnings here. Yeah, it's actually true. Yeah. I mean, if nothing else, we have to remember that some of these companies are much more cyclical than people think. I don't want to point out individual names. They are experiencing tremendous cyclical urges surges here. But the difference is normally when cyclical stocks have a a big cyclical earning surge, multiples compressed, this is very unusual. And that we're seeing this big cyclical surge and multiples are expanding, that really should be a warning sign to a lot of people about the sustainability of this growth. Look, Kelly, the way I would describe it is we all know that a Maserati is a great car, right? And, and if I tried to sell you a Maserati for Volkswagen price, you'd buy it in a second. You'd ask me for two or three of them. But if I tried to sell you a Maserati for 2 1/2 or $3,000,000, you'd say I was nutty. How come people understand that when it comes to cars or any, the economic transaction, you go to the, you go to the stock market and all of a sudden the Maseratis are worth a bazillion dollars. Let me put it a different way, you know, and I drive a Honda in a, in a Subaru, you know, sedan. So I, I, I'm with you, believe me, but I don't drive a Maserati either, to put it this way, if I could. So I, if I were to say, I'm actually quite concerned about some of the larger signals we're getting on economic growth. You talked about this unemployment rates rising, the consumers clearly starting to become a little tepped out, et cetera. The, the only thing I might feel comfortable owning in this market is the kind of stuff that's less exposed to that and is more exposed to the AI complete revolution that we have to build out. I would much rather be in those stocks. Why do I want to be in McDonald's or Starbucks or, you know, anything that would possibly face this couple percentage point erosion at the margin we could be heading into? I want to be over in data center and cloud, you know, whatever it is that's going to support this, this new build out. So it it feels ironic to say that I would be more comfortable with the far overextended trades than I would be with with everything else right now. So, so Kelly, that's kind of like what people were arguing during the tech bubble that there was going to be the build out of the Internet. There was going to be the build out of fiber optics and that that was the place to be. They were right. There was a build out of the Internet. There was a build out of fiber optics. But because the stocks were so expensive, it was a little room for disappointment. And what happened was, as you know, I mean, this is 84% earnings growth in the first quarter. These are stocks trading at 30 or 40 times forward. This is not pets.com. Well, oh, boy. Oh, it doesn't. Kelly, I hate to, I'm I'm going to, I hate to say this. It's a little bit selective memory there. It's a little bit selective memory. I have no real memory there. Yeah. Yeah. Go, go. Yeah. There were real. There were real companies in the tech bubble with real cash flow, real balance sheets. And if you bought those real substantial companies, companies that now like nobody would care about, like IBM, right? That was a big substantial company back then, Cisco right now, that's why why that's CSCO, right? These were real companies with real cash flow and real balance sheets. And what happened is if you bought them at the peak of the bubble, it took you between 5 and 20 years just to break even.

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