Why one multi-asset head sees reasons to underweight US stocks

Since hitting post ‘liberation day’ lows in early April, the S&P 500 has grown by over 20 per cent. The S&P 500 Information Technology index, which has been the primary growth engine for US equities, has grown by over 40 per cent. These indexes have hit new historic highs and US corporate earnings have come in strong. Investors have taken a very bullish position in the market and most investors have ended up overweight US equities and overweight AI-driven technology stocks, even if they only got there by buying passive market-tracking index funds.

Stephen Lingard, SVP and co-Head of multi-asset at CI Global Asset Management, sees reasons for some caution amid this significant run. He argues that as we now look ahead, there are some reasons to be underweight US equities and more constructive on other markets on the margin. He stresses the continued importance of US stocks for Canadian investors and advisors, but notes why some more discretion may be called for now.

“The fundamental outlook is good, we've had one of the best earnings seasons most recently and probably are on track for a good earning season coming up and no recession really on the horizon as a result of stimulative monetary policy,” Lingard says. “Policy and fundamentals are quite the tailwind, but what keeps the market from going parabolic is that people are looking at some of the narratives around the AI infrastructure buildout going too far and asking if sentiment has gone too high. There are a host of changes in terms of geopolitical shifts, a wobbly US dollar, and inflation. So there’s been a fairly orderly rally but a list of worries that are causing some investors not to participate.”

Just as sentiment towards US markets has remained positive, Lingard sees evidence of a rotation away from those stocks in the rapid price appreciation of gold, bitcoin, and some non-US markets like the Hang Seng. Some of those concerns around the US economy, however, aren’t deterring investors in the mega-cap technology stocks that have valuations tied more to the promise of their technology than the strength of the underlying economy. Lingard emphasizes that while this disconnect between the economy and the stock market has been beneficial for investors, it exposes them to risks associated with AI expenditures and the possibility that this AI spending doesn’t manifest in promised profitability.

The AI theme has also introduced a momentum dynamic in US stocks and the risks associated with overconcentration. Lingard, who is an active manager, notes that passive investing plays a role in this environment. The US market, he notes, is now invested in more passively than actively and cap-weighted passive products will end up adding more allocations to the biggest names, driving them all the higher. He notes that while key details are different, the dynamic of massive index-driven allocations to a concentrated few companies can remind Canadians of the Nortel saga, where that company’s massive valuations were buoyed by index investors until they crashed back down to earth.

Despite some alarm bells around specific stock valuations that this dynamic has introduced, Lingard notes that it is challenging to accurately value companies like NVIDIA which are so frequently able to massively beat earnings expectations. Looking at the market on aggregate, though, he sees a case for overvaluation risk as a bit more straightforward.

With strong fundamentals at the moment, Lingard is watching for signs that either liquidity in the US market is starting to dry up, or signals of surprises in earnings reports from any of the magnificent seven companies. He’s also watching for broader and more latent impacts of US tariff policy which might start to show in corporate earnings. He notes that some foreign investors are already electing to shift their equity allocations away from the US on the margin and that has driven his own team’s slight underweight towards US equities in their overall allocations, preferring Canadian, Japanese, and emerging market equities which Lingard argues are broadly less risky right now.

In an environment where US stocks continue to perform and look good, but with risks around concentration and overvaluation, Lingard accepts that advisors have a tough job to do. Clients may feel aggrieved about the current economic or political situation one way or another, and that could filter into their views on markets. Lingard stresses the importance of highlighting the distinct drivers of stock markets and economies as well as the appropriate use of historical allegory from moments like Nortel or the dot com bubble, not to induce panic but to emphasize prudence.

“The risk may be that you under-allocate to big momentum that are driving these markets because you're early on exiting the theme. But again, to control that potential downside risk, people will remember those moments extremely well,” Lingard says. “I do think that there are some challenges coming down the pipe still. And we have a lot of exposure to North American asset markets like currency, equity, and bonds. But I think there are some great opportunities outside of North America that are beginning to be realized.”