Is the S&P 500 investment track just a trend, and do the really big returns really come from the general track? Are the declines in the wake of developments that brought Nvidia down good news for the capital market and humanity overall? Yes, claims Amir Kahanovich, chief economist at financial planning and consulting service Profit Financial Group, and previously the chief economist at The Phoenix Holdings, Excellence Nessuah Investment House, and Clal Finance.

Talking to Globes” news editor Bar Lavi, Kahanovich explains why he thinks portfolios should be managed, insists that risk diversification is necessary, and discusses the loophole that grants insurance product tax benefits to savings channels. Plus: the surprises coming up that could change everything.

This week, we were surprised by a Wall Street downturn led by Nvidia, and then a quick comeback. How do you see it?

“The longer you’re in the market, the more you learn always to be prepared for surprises, and not count on anything. Jeff Bezos was once asked, Where do you see Amazon in 30 years? He said that it probably wouldn’t exist. They said, ‘What? How can you say such a thing?’, and he replied that historically, eventually some event happens that erases companies as companies, and they don’t survive. There are almost no companies that last a century. An event suddenly comes up — I don’t think this will kill Nvidia — but it demonstrated how suddenly a surprise can come out of nowhere and shake up everything. These days, international entities are suddenly saying that AI is enabling China to overtake the US in resource efficiency. This could change the game as to what the capital market will look like in the next decade.”

Kahanovich emphasizes that this is actually “an example of why it’s not worth betting on a particular industry or a particular country.”

As he sees it, the capital market is tricky, and the war in Israel is proof. “Despite the northern front, Iran, and the Houthis, the stock market here beats almost all other markets in the world and the shekel is getting stronger. Even during Covid — there was a global recession, but the capital market went up. We learn to be modest in the way we see the future, , so we need a broad spread.”

“Broad diversification is safer than a bank deposit ”

The phrase “Don’t put all your eggs in one basket” has become a cliché that guides every fledgling capital market investor. But in an era in which information comes in from every direction, the question isn’t whether to diversify investments, but how to do so intelligently and methodically.

According to Kahanovich, the basic principle is true for “geography, currencies, industries, asset classes, government bonds, corporate bonds, linked and unlinked bonds, short, long… There are so many things you can diversify into, including off-exchange assets that have their own advantages and disadvantages, such as infrastructure investments.” He goes so far as to say that “The diversified package is safer than a bank deposit.”

“Even within stocks, you can say, I’m in the S&P, but suddenly Germany is leading, so what about the DAX, which has risen 7% since the beginning of the year? The Dow Jones, the American industrial average, rose while Nasdaq fell. Even now, foreign entities are recommending that investors should start diverting money to China, because it turns out that they’re no fools.”

So how do you do it? As a private investor, I can buy an apartment or Nvidia shares, but I don’t know how to invest so broadly.

“For something like this, you need an investment manager,” admits Kahanovich. “Only he knows how to do it. If there was an ETF like that, with zero management fees – I would go for it. Unfortunately, there isn’t, because someone has to do the work, make adjustments, utilize tools.”

Kahanovich notes that while institutional entities (insurance companies and investment houses) have different tracks, “They open and close them according to trends.”

He adds that the general track is actually the strongest: “In the end, there’s one track for each of these entities, called the general track where there you can find the diversification I was talking about. It’s their showcase, and I’m telling you, as someone who worked at these entities, they invest all their management resources in making the best returns there. So that you can drive along the Ayalon highway and see billboards stating they’re number one. That’s where they present the diversified, general track. It’s the safest place to be, and it gives amazing returns over the years. Last year, these tracks made 13% or more in most entities.”

According to him, these tracks can also do much better than well-known stock indexes like the S&P 500. “It’s an index that is very sector-biased, and very dollar-biased. Its high volatility doesn’t suit most people. We’ve also seen long periods where it hasn’t gone up at all.”

Kahanovich then makes a critical point. “Moreover, I say: you don’t know what will happen in the future. If I tell you now that the S&P 500 will make zero percent in the next 30 years, you can’t contradict me. It can happen, and we’ve seen it happen. Japan’s S&P 500 the Nikkei 225, stopped in 1989 and has only been going down since then; it only recovered last year. It can happen to any index. The beauty of a managed track like the general one is that we don’t have a single example of someone who lost more than two years in a row. Unlike the S&P 500, where you can sometimes reach very, very long periods of losses.”

According to Kahanovich, the S&P 500 lacks is “internal defense mechanisms.” “Look at what happened at the beginning of the week: the stock market fell, but the bond market rose. That’s what creates defensive mechanisms. In a general, diversified track, I have many defenses that don’t exist in the S&P 500 or any other specific index.”

What about the differences between the general tracks of the various entities?

“First of all, you won’t see very great differences between the big players. Still, everyone picks their own battles. One says, I’m going for very long-term bonds. The other says, I’m going for short- term bonds. The third overweights China and emerging markets. We at Profit Finance don’t like it when entities sometimes pick fights. I prefer things to stay more or less average. I don’t want extremes, not this way or that way.

“If entities go to extremes, we can decide to reduce our clients’ exposure to them. We provide value to our clients by knowing how to place them with the managers whom we expect will do better at that moment.”

How significant is the issue of management fees?

“The management fees at most entities are quite similar, there are no dramatic difference between them. This market is very competitive. In any case, the only way to avoid management fees completely is to trade independently, but a financial entity gives you better quality management, free foreign exchange conversions, you don’t have to pay transaction fees on buying and selling, and there are also tax benefits. There’s not much tax when switching between different risk tracks, for example.” Kahanovich also claims that “people who try to manage portfolios independently usually do it for up to three years, then transfer them to professional management, after they realize how much damage they’ve done to themselves.”

“Hiding cash in a coffee can doesn’t build wealth ”

What tips do you have for savers?

“First and foremost, check with a professional what level of risk is right for you. Sometimes people get into trouble when they don’t understand the amount of risk they’re taking. You need to make sure that your portfolio is sufficiently diversified, and this is done with a professional. It’s also important to understand the time frames when you’ll need the money.”

He does, however, qualify that, “You shouldn’t pay someone who claims they can beat the S&P 500,” but rather, “You should pay a manager to build an effective portfolio that will reduce volatility by diversifying between different types of investments. If my portfolio is diversified between different types of investments, my capital grows safely and steadily.”

Kahanovich emphasizes that even if someone makes “only” 7% a year, “within 10 years he’s doubled his money. A person who saved a million shekels by the age of 40, will have NIS 2 million at the age of 50, and by retirement age 70, it will be NIS 8 million. If you’ve saved a million and don’t have NIS 8 million by retirement, it means you made a mistake. These investments and being careful — that’s what will build your capital.”

Regarding money market funds, Kahanovich says, “It’s just a little more than a deposit. They mainly have tax benefits, and a slightly higher return. But it’s a level of returns that won’t build your capital. You don’t understand how dramatic this is, in terms of damage to capital building. Most of the money you or our audience will have at retirement age doesn’t come from work. No matter how much you save on morning coffee at the local cafe and say, OK , I saved a few more shekels… most of your savings won’t come from that. Most of your savings will come from putting the money in a place where it will grow every year. If you make, let’s say, 7% on it, which is more or less what people who spread their money across many tracks and not in one niche achieve, you will guarantee yourself much more money than a person who earned twice as much as you, but put his money in a deposit account.”

Are there any financial products you focus on in particular? Advanced training funds? Investment provident funds?

“Each has different advantages, whether in taxation or different costs. A financial planner should maximize them for you. He or she will take into account when you need the money and what tracks to put you on. And of course, it is best to set aside for retirement tracks, because, first and foremost, they have a lot of benefits. We really like the savings policy product, which many people don’t know about, because the bank won’t tell you about it.”

What is a savings policy? Kahanovich explains that, “Insurance companies have the option of offering you pension insurance, but without the insurance. It’s ostensibly an insurance product, but the proportion of insurance is zero. It’s an insurance product with no insurance, but it still has all the tax benefits. I wouldn’t call this a ‘loophole’ or anything like that, but it is a platform that allows you to enjoy many benefits and an amazing return. They manage money better there, for the most part.”

When entities are compared, he adds, the returns on these policies are higher because “they usually manage it within the same basket as your pension fund and your training fund – and where’s the advantage in that? Mainly during a downturn. Then, the fund manager is less stressed, because even when there’s pressure to sell, the clients continue to save for retirement. So, you don’t even have to sell, just stop putting new money into a particular investment. He doesn’t have to sell at any price, he’s much more liquid.”

Are investors more mature today?

” We see a great deal of understanding and much progress. It’s a bit worrying that this understanding actually drives people towards trends and pundits. And yet, when I see a person who gets into the S&P 500 in the midst of a crisis, I know that he knows how to deal with a high level of risk. But whoever goes in after the rises carries a warning sign. On social media, people get too carried away by trends, unfortunately. As soon as there’s a trend, the institutions will do whatever you want. If tomorrow, for example — an extreme example — the Zimbabwe stock exchange stars, they’ll open a Zimbabwe track. What do they care? They’ll sell what the public wants.” Kahanovich also says that “investment managers don’t put their money in the S&P 500, but in general tracks.”

“Yes, Nvidia went down, but other companies went up”

In conclusion, regarding the current market turmoil, Kahanovich suggests taking a broader perspective: “It’s true that Nvidia’s stock fell on a certain day because perhaps fewer people need its chips. But this is a huge leap for humanity. It means that my phone can suddenly do things that I thought I needed more processors to do.

“In my opinion, the market should rise given the amazing technological development we’re hearing about. Excluding the large companies that were hurt by this news, who are actually deeply invested, in the hundreds of billions, we see that other companies have gone up. Nvidia is simply so big that it pulled the index down at the beginning of the week – and up the next day. Ultimately, this is a positive event and you never know where it will lead us in terms of growth.”

This article was originally published in “Globes” in Hebrew on January 30, 2025.

The “Globes” Financial Growth Track series took place in collaboration with Profit.

Published by Globes, Israel business news – en.globes.co.il – on June 22, 2025.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2025.

Robots have fascinated humans for decades.

My favourite, C-3PO from Star Wars, was fluent in 6 million forms of communication. The Terminator (aka Arnold Schwarzenegger in the films of the same name) was unstoppable.

Off screen, sci-fi promised machines that were intelligent, capable and even sexy. But the reality was far less inspiring.

Confined to the factory floor

Robot 1.0, the first generation of robots, revolutionised factories but never stepped beyond them. They were painstakingly pre-programmed to work through fixed routines in highly controlled environments.

Years ago, at an event staged by the US Defence Advanced Research Projects Agency (Darpa) , I watched experimental humanoid robots stumble around like toddlers, taking 20 minutes to walk 50 metres as they slowly worked through the millions of calculations required for each footstep. It was painful to watch and even harder to believe in the future.

AI arrives and everything changes

If you haven’t already, please do watch Figure AI’s demo videos to see Figure 01 and Figure 02 in action.

Backed by Nvidia, Microsoft, Jeff Bezos, and OpenAI, Figure AI has already secured its first commercial contract with BMW, aiming to deploy humanoid robots directly into factories, working alongside human employees and adapting to tasks as they go.

Amazon is already proving how transformative robots can be. In the past three years, it has developed six new warehouse robots, covering almost the entire fulfilment process.

Morgan Stanley calculates that every 10% of US retail units flowing through Amazon’s next-generation robotic warehouses (like the one in Shreveport, Louisiana) could generate $1.5-3bn annual savings. If Amazon reaches 30-40% automation by 2030, total savings could exceed $10bn.

Suddenly, all the ingredients are finally falling into place. The underlying hardware has improved, giving us cheaper, more dexterous actuators, smaller and more affordable sensors, and batteries that last long enough to matter. The cost curve has been hard at work to make these modular parts much less expensive.

However, the real unlock has been AI.

The latest generation of AI-focused GPUs has been a game-changer. Traditional computing has focused on processing instructions sequentially, operating in a linear, two-dimensional way.

AI focused GPUs process vast amounts of data in parallel, leading to an exponential increase in the number of calculations that can be made per second. This allows robots to process sensor data, predict movement, and make decisions in three dimensions in real time.

The Nvidia factor

Nvidia isn’t building its own humanoid – it doesn’t need to.

Through Project Gr00t, Nvidia is working with most of the leading humanoid developers, supplying the AI models and training infrastructure needed to teach robots how to move, see, and act.

Nvidia’s Jetson chips already power the brains of many robots, handling real-time processing for vision, motion, and sensor fusion. For more demanding applications, Nvidia’s upcoming Thor chip will enable robots to run advanced AI models directly on the machine itself.

With large language models, vision models, and reinforcement learning, robots can now understand unpredictable environments and follow natural language commands.

They can recognise objects, infer human intent, and even self-improve through training in AI-powered simulations. Most critically, what one robot learns, every robot learns.

Up next – the simulation revolution

For decades, teaching a robot a new task meant coding every movement manually – a painstaking and inefficient process. Today, AI-powered simulations allow robots to train in virtual worlds before ever touching the real one.

Nvidia’s Isaac suite of AI-powered robotics technologies provides full simulation environments where companies can train robots virtually and help them master perception, control, and planning—the core skills every useful robot needs.

Here, questions arise for Tesla. The company may have logged millions of real-world miles for its autonomous vehicles, but is that still an edge if AI can now simulate all of that in an hour?

For robots and self-driving systems alike, the ability to train continuously in virtual environments – running millions of scenarios at machine speed – is becoming more valuable than real-world experience.

The $80bn opportunity

Morgan Stanley forecasts humanoids could become an $80bn market in the US alone by 2035, adding at least 50 basis points to annual industrial GDP growth. In a developed world where productivity growth has often stalled, that’s no small change – it’s a robotic stimulus package that is probably just at the beginning.

There is one thing that Elon Musk and Sam Altman agree on: AI agents and physical AI will be massively deflationary.

If humanoids drive down the cost of labour-intensive services, we could be heading into a future where the price of physical work collapses, pulling down the cost of nearly everything, leading to negative interest rates as central banks struggle to generate inflation in a world of abundance.

Musk has claimed that Tesla’s humanoid robot platform, Optimus, could eventually be worth more than Tesla’s entire car business. Musk is no stranger to hyperbole, but he has created enough muti-billion companies to generate some credibility on this point.

Expect more news soon – Nvidia’s annual GPU technology conference (GTC) this week has 58 sessions related to robotics, with names such as ‘The Rise of Humanoids’ and ‘Igniting the Real Robot Revolution’.

Beyond economics

Humanoids aren’t just an economic story; they’re a geopolitical one. If robots reshape the global workforce, they’ll reshape global power too. It’s not hard to imagine US soldiers facing off against Chinese humanoids one day.

China isn’t wasting time. In Morgan Stanley’s Humanoid 100 index, which tracks 100 robotics exposed stocks, nine of the top 10 performers this year are Chinese. That’s no accident, it’s the result of decades of industrial policy, flooding capital into motors, sensors, batteries, and the minerals that power them all.

The idea of robots as real workers, not gimmicks, is starting to look less ridiculous and more inevitable. Jensen Huang and Elon Musk aren’t just making bold predictions. They might be making the most important bet of the decade. It is time to start building some Robot 2.0 plays in your portfolio.

Pure plays on robotics are far and few between, although Ark Ventures has a holding in Figure AI, forming 2% of its portfolio.

Otherwise, the best positioned plays for this era could be Nvidia, Tesla and Synopsys, a US electronic design automation group.

The secret tech investor is an experienced professional who has been running tech assets for more than 20 years.

The Oracle of Omaha’s secret portfolio contains 120 securities — one of which is a historically cheap AI stock.

Few money managers draw the attention of professional and everyday investors quite like Berkshire Hathaway’s (BRK.A -1.91%) (BRK.B -1.96%) Warren Buffett. Spanning the roughly six decades the Oracle of Omaha has been CEO of Berkshire, he’s overseen a cumulative gain of better than 5,385,000% in his company’s Class A shares (BRK.A).

Thanks to Form 13F filings with the Securities and Exchange Commission, riding Warren Buffett’s coattails to sizable long-term gains has been a viable investment strategy. A 13F provides investors an under-the-hood look at which stocks money managers with at least $100 million in assets under management (AUM) have been buying and selling. Buffett oversees a 44-stock, $292 billion portfolio at Berkshire Hathaway.

Yet what might come as a surprise to investors is that Berkshire Hathaway’s quarterly filed 13F doesn’t tell the full story of all the securities Buffett’s company is holding.

The Oracle of Omaha has a $642 million “secret” portfolio

One of the strategies Buffett has employed to grow Berkshire Hathaway over six decades — beyond just being a long-term investor — is to acquire businesses. Berkshire has made around five dozen acquisitions with Buffett at the helm, including insurer GEICO and railroad BNSF.

However, one transaction stands out as altering which stocks and exchange-traded funds (ETFs) Berkshire Hathaway owns.

In 1998, Berkshire Hathaway announced it would acquire reinsurance company General Re for $22 billion in an all-share deal. Though the reinsurance operations were the crown jewel of this buyout, General Re also owned a specialty investment fund known as New England Asset Management (NEAM). When Buffett’s company closed on General Re in December 1998, it became the new owner of NEAM.

New England Asset Management ended the September quarter with $642 million in AUM spread across 120 securities. Even though Buffett doesn’t oversee the investment strategy of NEAM’s portfolio in the same way he does for Berkshire Hathaway’s $292 billion portfolio, what NEAM owns is, ultimately, part of Berkshire Hathaway. Thus, New England Asset Management is Warren Buffett’s “secret” portfolio.

Because NEAM is managing $642 million in assets, it’s well past the threshold of needing to file a quarterly 13F. In other words, investors can keep a close eye on which stocks are being purchased and sold every three months for Buffett’s secret portfolio.

Similar to the Oracle of Omaha, NEAM’s advisors tend to be value oriented. With the stock market at one of its priciest valuations in history, Buffett’s hidden portfolio has been a fairly persistent seller of high-growth tech stocks of late, including some of the most-popular companies in the artificial intelligence (AI) arena, such as Nvidia and Microsoft.

However, one AI stock Buffett’s secret portfolio is selling might be one of Wall Street’s smartest buys.

A mistake in the making? Buffett’s secret portfolio dumps a top-tier AI stock

According to the researchers at PwC, AI is a massive opportunity, as evidenced by their call that artificial intelligence will add $15.7 trillion to global gross domestic product come 2030. But with most AI stocks soaring, funds like NEAM have rung the register and locked in their gains.

At the midpoint of 2023, Buffett’s under-the-radar portfolio was holding 30,400 shares of Alphabet (GOOGL 1.56%) (GOOG 1.61%), the parent company of internet search engine Google, streaming service YouTube, and cloud infrastructure service platform Google Cloud, among other ventures. But after persistent selling by NEAM’s asset managers for five consecutive quarters, only 5,195 shares remain, as of the September-ended quarter. This represents a decline of 83% spanning 15 months.

Unlike Nvidia, which develops the hardware used by businesses to power their AI-accelerated data centers, Alphabet’s AI ties are usage-driven. Specifically, it’s incorporating generative AI solutions into Google Cloud to allow its customers to build and train large language models, deploy AI agents, and improve their marketing efforts.

Based on data from tech-analysis firm Canalys, Google Cloud clocked in with a 10% share of global cloud service spending during the third quarter. Since enterprise cloud spending is still in its relatively early stages of expansion, Google Cloud is expected to sustain double-digit sales growth and juicy margins.

While artificial intelligence is the future growth driver for Alphabet, its search engine continues to be its foundational cash cow. Google accounted for nearly a 90% share of worldwide internet search in December 2024, per GlobalStats, and has consistently tallied 89% to 93% of global internet search share over the last decade. Being the clear top choice for businesses wanting to target users with their message(s) should afford Alphabet substantial ad-pricing power.

Something else Alphabet has working in its favor is its cash-rich balance sheet. The company’s cash, cash equivalents, and marketable securities totaled $93.2 billion, as of Sept. 30, with Alphabet generating north of $105 billion in operating cash flow over the trailing year (also as of Sept. 30). Having a treasure chest of capital affords Alphabet the luxury of buying back its stock, paying a dividend, and aggressively investing in high-growth initiatives, such as its AI-driven cloud infrastructure service platform.

But the biggest mistake of all for Buffett’s secret portfolio may be selling the majority of its stake in Alphabet while it’s still historically cheap. Shares of Alphabet can be picked up for 21 times forecast earnings per share in 2025 and roughly 15.7 times projected cash flow. Both figures are below Alphabet’s average forward price-to-earnings ratio and price-to-cash-flow ratio over the trailing-five-year period.

In other words, Alphabet remains historically cheap and attractive while some of the most-popular AI stocks trade at premium valuations.

I had the privilege of speaking with some top investment thinkers for Morningstar’s The Long View podcast this past year. Christine Benz, other colleagues, and I interviewed portfolio managers, strategists, and economists. Many—though far from all—of my favorite moments from 2024 are included in the Best of The Long View: Investing episode.

Several common themes emerged from the interviews. As investors think about portfolio positioning for 2025, here are a few ideas I found compelling:

Tread Carefully in US Equities

Whether it was the investment team at Primecap Management, Pimco CIO Dan Ivascyn, or market historian Jeremy Grantham, several guests sounded warnings about the US stock market. It’s no secret that a handful of stocks have dominated. Nvidia NVDA and Microsoft MSFT now exceed $3 trillion in market capitalization; both Amazon.com AMZN and Alphabet GOOGL are worth more than $2 trillion; and Meta Platforms META is approaching that mark. Concentration levels have risen markedly, with the top 10 constituents of the Morningstar US Market Index representing 31% of its weight. That well exceeds the 24% level reached in the late 1990s, which rang alarm bells back then and preceded a market crash.

“At some point, the law of large numbers kicks in,” said Primecap’s Joel Fried in early 2024. “We think the market assumes that this group of companies will grow revenues at a compound annual rate of at least 10% over the next five years … That’s an extremely high bar in our opinion.”

Grantham believes that a speculative bubble has inflated on enthusiasm for artificial intelligence’s promise. Comparing AI to canals, railroads, and the internet, Grantham said: “When you have these great developments, they overdo themselves in the short term, they crash in the intermediate term, and then they come out of the wreckage and change the world in the long term.”

Current valuations diminish return potential for US equities. The Morningstar US Market Index trades at a trailing price/earnings ratio exceeding 26, which is reminiscent of the late 1990s as well as 2021. Stocks went on to crash in both 2000 and 2022. According to Ivascyn:

“[A]t the current starting point for high-quality global bond yields versus starting equity valuations, there’s a chance that the returns over the next five or 10 years will be very, very similar with less volatility or less uncertainty in fixed income. There’s even a decent part of the distribution where high-quality bonds outperform equities over that same period.”

Bonds outperforming stocks is not unheard of. For the first decade of this century, the Morningstar US Core Bond Index produced an average annual return of 6.4%, while the Morningstar US Market Index‘s return during that period was negative. Over the past couple of years there hasn’t been much reason for US investors to own bonds over cash, but Sonali Pier of Pimco used a memorable phrase to urge investors to consider a more strategic, long-term fixed-income allocation: “Don’t rent yield.”

Artificial Intelligence Has Serious Investment Implications

Not a single guest we spoke with dismissed the transformative potential of AI. “AI is serious. It will change everything,” said Grantham. Ankur Crawford, an investor in growth equities at Fred Alger Management, foresees massive productivity gains. “When software begins to write software, innovation becomes exponential.” Crawford sees winners in some indirect AI beneficiaries, such as electricity providers to data centers, and Cadence Design Systems CDNS, whose software enables chip design. Jody Jonsson of Capital Group is looking beyond technology companies for innovative applications of AI. “[O]ne of the sectors I’m really intrigued about is healthcare as a potential benefactor, whether that’s coming up with more molecules for drug discovery or speeding up that process or being able to test more of them,” she said.

Like any disruptive technology, AI will also bring losers. Crawford sees many software companies as vulnerable. “[W]hat happens to a software company that resides on code? Is that good or bad for margins? And our conclusion is that over time the margin structure for software businesses will for the most part be under pressure.”

Look For Opportunities Lower Down the Capitalization Spectrum

We spoke with a number of managers who invest in smaller-cap stocks—an out-of-favor asset class. The Morningstar US Small Cap Extended Index had a postelection surge, just as it did after the elections of 2016 and 2020, but the past decade has favored large companies over small ones. The last calendar year in which small caps meaningfully outperformed in the US market was 2016—this despite periods of strong economic growth and interest-rate cuts. Both are supposed to boost the asset class.

While it’s fair to be skeptical of investors singing the praises of their area of focus, our guests JB Taylor of Wasatch Global Investors, Keith Lee of Brown Capital, and Charlie Dreifus of Royce made strong arguments as to why investors should not overlook US small-cap stocks. Dreifus cited the departure from years of low rates and a “risk-on” mindset that favored large caps of a growth persuasion. Lee mentioned the discount at which small companies trade. Highlighting the cyclicality of market leadership, Taylor sees big upside in smaller caps:

“[I]f you go back over the last 100 years, the average performance period of large beating small or small beating large is about 10 years on average. And so, the longest period of large-cap outperformance was 14 years, and it was the period leading right up into the internet bubble … We haven’t seen small caps broadly this cheap versus large caps at any point in the last 25 years.”

Remember Stocks Outside the US

Christine Benz and I got to interview two great global investors live onstage at the Morningstar Investment Conference on a lovely Chicago summer afternoon. David Herro of Harris Associates and Rajiv Jain of GQG Partners answered “yes” to the question posed by the panel title: “Should US Investors Renew Their Passports?” Jain suggested the outperformance of US equities over the past 15 years has made investors forget the benefits of global diversification. He reminded the audience that from 2000 through 2010, “you actually didn’t really make any money in the US.”

Herro expects the situation to change. “I say if it looks bad in the rearview mirror, the front windscreen looks really good.” He pointed to a significant valuation advantage for international equities. “It used to be the US traded at 14%, 15% premium. Today, that number is almost a 50% premium.”

Currency dynamics have contributed to poor returns for international stocks from the perspective of unhedged US investors. “Don’t forget the dollar bottomed in 2014,” said Herro, who argued that the dollar’s appreciation against major global currencies over the past 10 years has resulted in a situation where “looking forwards, you have a double positive: underpriced stocks using underpriced currencies.”

There’s no shortage of investment opportunities outside the US, in the eyes of our guests. Herro, for his part, sees value in many European companies. Jain is a fan of emerging markets like India and Brazil. According to Carl Vine of M&G, [T]here’s an incredibly strong and potentially long-term structural earnings story for the Japanese equity asset class.” Vine also called Japanese small caps “the most fascinating little pocket of the global equity market.” Justin Leverenz of Invesco identified emerging markets as “incredibly attractive.”

Beyond current market dynamics, Jody Jonsson made more of a structural case for global equities exposure:

“I think it’s a bit myopic to think that all the great companies are located in the US. Clearly, the US market has been very strong, and there are many dominant companies that are domiciled in the US. But increasingly, as you think about global champions, it doesn’t matter as much where they’re domiciled as where they do business. And in certain industries, there really aren’t even real US competitors.”

Beware of Macroeconomic Forecasts

The consensus economic outlook has been well wide of the mark lately. How long was the debate raging over whether the US economy was heading for a “hard landing” or “soft landing?” Somehow, we are still airborne. Remember when the market was anticipating seven interest-rate cuts in 2024? We were lucky to get three.

Christine and I asked Neil Shearing of Capital Economics whether this period has been especially difficult to forecast. He replied, “[T]here’s a tendency in every period to say the outlook is unusually uncertain.” Then he went on to explain that the manufacturing and services sectors of the economy diverged as a result of the pandemic, which made the economic landscape especially difficult to read. Sébastien Page of T. Rowe Price also cited the coronavirus pandemic, observing that “stimulus has distorted all the models.”

Economic forecasting is difficult. Especially over the short term, indicators like gross domestic product, inflation, and interest rates are affected by a complex interplay of variables—some unforeseen. For this reason, making big investment bets based on an economic outlook is risky. An investor who had bet against US equities and on US bonds in 2024 on expectations of recession and rate cuts would have ended up disappointed.

Big bets, in general, can backfire. Momentum is a powerful force in markets, so we could see more of the same in 2025. In that case, portfolios positioned for changes in market leadership, whether it’s bonds over stocks, small caps over large caps, or international over US equities may disappoint. Longer term, though, valuation can be a useful investment guide.