While equity investors have enjoyed strong gains indicating a maturing bull market, the equity cycle has not reached its end. It is, however, normal and natural for the drivers of return to evolve over a market cycle.
We are now at a point of inflection for those drivers, which will create both volatility and opportunity.
Valuations rising from crisis levels have accounted for the majority of returns for equity investors. However, this is largely a theme of the past as multiples have reached previous cyclical highs in many cases. We are now entering a more complex and stock/industry specific environment.
Investors remain cautious of stocks with cyclical exposure, and have done so through much of this bull market which has demonstrated an unusually defensive tone. However, increasing exposure to stocks with earnings sensitivity at this point in the market cycle should reap rewards. Defensive stocks retain premium valuation levels, implying selectivity is important to avoid disappointment.
The ability to apply contrarian decisionmaking in a period where top-down concerns will re-emerge will be important. Challenging data points ahead for the global economy will present opportunities to refresh portfolios as volatility rises.
