AOR Update (Podcast): Less “magnificent” earnings expectations

The podcast discussion with Jeff Schulze from ClearBridge Investments highlights a positive outlook for the US economy, supported by the ClearBridge Recession Risk Dashboard, which shows nine out of twelve indicators in the green, signaling economic expansion. Manufacturing is expected to rebound, despite recent struggles, with potential boosts from favorable tax policies and a shift back to goods demand. However, tariffs remain a significant concern, with ongoing negotiations with major trading partners like Mexico, Canada, and China, although any escalation is expected to be targeted and not overly disruptive.

In the equity markets, the services sector is favored over goods due to tariff uncertainties, and smaller companies with less international exposure are seen as less vulnerable. The "Magnificent Seven" stocks, heavily reliant on overseas revenue, may face challenges, prompting a potential rotation towards value, small-cap, and mid-cap stocks. This shift is supported by anticipated earnings growth outside the top-performing stocks.

The emergence of AI technologies, such as DeepSeek, introduces both risks and opportunities, potentially lowering costs and increasing productivity in various sectors, particularly services. Long-term investors are advised to consider active management and a rebalancing towards value stocks, which have historically outperformed growth stocks in similar market conditions. Despite expected short-term volatility due to tariffs, the overall economic foundation remains strong, with deregulation and tax cuts anticipated to drive future growth.