Value Stocks Set To Outperform Tech Into The End Of Year? | Lance Roberts

Roberts distinguishes two election-related historical patterns: 16 of the previous 19 midterm years were positive from October through year-end, and 12-month S&P returns after midterms were historically positive across government combinations, but he says a Republican president with Democratic control of both chambers had the lowest historical S&P return among the configurations discussed. He attributes the latter comparison to policy averages, including the potential effects of higher taxes and more restrictive regulation, and cautions that historical averages do not guarantee current returns.

Roberts links the 10-year Treasury yield near 5.3% to inflation risk from oil, near-4% growth estimated by the Atlanta Fed, real yields, fundamentals, and a roughly 1% term premium. The yield outlook is divided: Chris Wayland sees normalization higher and says yields could reach 7% to 8% over the long term, while Roberts says RAA expects yields to trend down over the next couple of years.

Roberts says current capex spending may end within two years, potentially making weakness in the real economy more apparent, and argues that debt and deficits can erode activity and growth over time. The speakers also say a more rational cost of capital can clear out malinvestment but may involve disinflationary or deflationary periods; Roberts describes rates as normalizing after years of suppressed borrowing costs.

Roberts says market-cap-weighted S&P 500 and Nasdaq indexes reached all-time highs after recovering from a 10% correction, even as the market had largely gone nowhere over six months and the equal-weighted index showed a different picture. He also describes an early, not yet major, rotation toward developed and international markets, small-cap value, financials, industrials, and utilities, while noting that higher rates pressure small- and mid-cap companies with weaker cash flows or refinancing needs.

Roberts describes a contrast between fearful sentiment— the CNN Fear & Greed Index was in fear and retail investors were mostly sidelined—and corporate guidance, with 72 companies raising guidance versus 44 at or below prior levels, a record number raising guidance. Credit indicators were also mixed: spreads had widened among the lowest-rated C and double-C debt, but Roberts said broader spreads were not showing comparable stress.

Roberts says strong demand, including from foreign buyers, appeared at 10-year and 30-year Treasury auctions, with buyers potentially seeking to lock in current yields. He says bonds now provide 53% of the return investors need to reach their goals, compared with about 12% three years earlier, but cautions that a 5% Treasury yield does not account for inflation and that equities can help adjust a portfolio for inflation over time.