By Michael Connor
NEW YORK (Reuters) - Wall Street's rally is not nearly done, with cyclical stocks set to ride higher even as hopes dim that America's government can deliver business-friendly economic reforms, U.S. money manager Richard Bernstein said on Wednesday.
CEO of RBAdvisors, and a former chief investment strategist at Merrill Lynch, Bernstein focuses on company profits at the sector level and said in the Reuters Global Markets Forum he sees no signs a rally that began last year in U.S. stocks is sputtering.
Investors now steering money to other areas are ignoring the bright prospects for U.S. corporate profits, which Thomson Reuters I/B/E/S has as up 15.4 percent in the first quarter from early 2016.
The following are edited excerpts from GMF:
Question: The S&P 500 is up 300 points from November. Is it time to take some money home?
Answer: The shift to cyclicals during 2016 that started in February was based on fundamentals. The election (of President Trump) exacerbated that run as the markets began to look for overheating and inflation based on the combo of a healthy economy and Washington's proposals.
However, the "sugar high" has evaporated. Unfortunately, that has reinforced investors' fears about growth, and you've seen a massive defensive run. I would argue the defensive run is NOT based on fundamentals. Rather, it is momentum investing and fear. The bull market isn't over in our view.
Q: What do you take from the strong U.S. first-quarter profits?
A: That makes the defensive run so curious. The average U.S. company is strongly growing profits, but no one seems to care. Quite weird. We don't see the U.S. profits cycle peaking for a few quarters yet.
Q: Are there big variations in earnings gains among sectors?
A: Earnings in most cyclical sectors have been quite healthy .... (Diverging) U.S. sector performance would lead one to believe that the U.S. is heading for significant slowdown or a recession. Neither of which seem evident.
Q: Are there signs businesses are overinvesting in a way that often precedes a downturn?
A: CapEx is typically during the later stages of the boom .... Well, cyclicals aren't at that place now: that's for sure. No boom in CapEx is good and bad. Good because it means no over enthusiasm, which argues for longer cycle. Bad in that it means continued slower-than-trend growth.
This interview was conducted in the Reuters Global Markets Forum, a chat room hosted on the Eikon platform. For details, please follow this link: http://forms.thomsonreuters.com/communities/