Transcript:

Caroline WoodsIt’s a holiday shortened week, but we have a lot to get to here to discuss what’s driving the stock market this week is Phil Neuhart, Senior Director of Market and Economic Research at First Citizens Bank. Phil, great to have you here at the desk.

Phil NeuhartThanks for having me. Excited to be.

Caroline WoodsHere. So some potential tariffs seem to have the market on edge today. Do you look at this as just noise or something more serious.

Phil NeuhartYou know I think this tariff noise reminds us of a couple of things. One tariffs are fluid. Right. Just because there’s a particular tariff rate assigned to a country or region does not mean is final. Additionally, I think it’s a reminder of this administration is going to use tariffs beyond its economic policy as a foreign policy tool. Times like this, we remind clients to have a plan and stick to that plan. This is noise, right? And as we were reminded early last year, if you react and try to time markets at times like this, that is really when you can impair a portfolio. Try to look through this, try to make sure you’re allocated properly and not focus on the headlines of the day.

Caroline WoodsOkay, so dig into what that plan should be to kind of navigate some of this noise.

Phil NeuhartYeah. So one we believe in diversification right. And that’s of course something that they can sound boring. But but it’s really an important tenet of the markets. We are positioned for broadening that is important in our view. We’re overweight small caps for example. We have international diversification. Then also think about the balance in your portfolio. Unlike a few years ago, fixed income really is a viable asset class. You have a yield and fixed income. The aggregate bond yielding over 4%. Municipal bonds are yielding. So we do think that there is return to be had at coupons we had at fixed income. Don’t focus just on equities.

Caroline WoodsI want to talk to you about the international diversity. Yes. For just a second because the sell America trade you see gaining a lot of traction. Are you saying to to diversify internationally because of what’s going on or because of valuations, I guess would a potential trade war over Greenland make you not want to buy U.S. stocks?

Phil NeuhartIt’s really been more valuation story. We are still fully invested in the U.S., but we think there are opportunities there nationally. For example, we’re overweight international small cap. There is a valuation story there. That was a trade we had on last year as well. And did work. As you look back at 2025. But no, we are not in the Sell America camp. We think that a much like last year, a lot of that is is noise, to be honest. And that America still stands very strong from a financial market perspective.

Caroline WoodsDo you think that your portfolio should be more heavily skewed, international or balanced? I guess with with us exposure more balanced?

Phil NeuhartIs it to to be clear, for example, emerging markets, we’re actually underweight emerging markets. We think that’s a fall to asset class at a volatile time. So it is not skewing heavily towards international. But having that diversification that balance of your portfolio is important.

Caroline WoodsAnd what about tech. What sort of tech exposure should you have in 2026 because it’s been underperforming aside from a few not Meg seven names for the most part. How should investors be thinking about potential gains there.

Phil NeuhartYeah. So so first, you know if you’re investing the US stock market you’re going to own tech. Just because it’s such a high proportion seven names 40% of the S&P 500. If you look within our equity portfolios we are up in quality. We have a factor based approach. So what does that mean. That means we like things like profitability profit margins we’re underweight. Things like leverage that does actually push us towards tech. We are overweight tech but also towards some more defensive sectors. Consumer staples for example. Utilities are another example. So a little bit of a barbell approach where we don’t think you should be, as you mentioned just in seven diversify across the 500. And honestly, as I mentioned, even into places like Small Cap.

Caroline WoodsSo is it time to rotate sectors or is it time to have a broad market approach?

Phil NeuhartIt you know what the answer is a little bit of both. Yes.

Caroline WoodsYes to.

Phil NeuhartBoth. Yeah. So so we choose is one we keep sector constraints in terms of our allocations. We want to be invested in the market. That said we have more tilts. So we don’t think that you rotate sharply as it you just completely exit something like technology that that’s not our approach. We think you want exposure, exposure to the marketplace. But tilts is more how we think about investing within the equity market.

Caroline WoodsI was taking a look at your 12 month S&P price target of 7200. That’s right. That’s only I mean I guess on a down day like today it’s a little bit more than modest. But it really is only modest upside from here. If that’s the case our stock’s actually the best place to be.

Phil NeuhartSo so we come into this year cautiously constructive. Our price target as you mentioned is up mid-single digits from here. That’s an okay year. It’s just nothing like what we saw the last three years. We don’t think that we move to that price target a straight line. We do expect volatility. I’m not saying that just because of today, something we expected coming into this year, the smooth ride of the back half of last year. We think it’s difficult to persist. There is a tension between elevated valuations but still good earnings and margins. You need to be invested in US stocks with. That is not what we’re shying away from, but the expectation that returns are always going to be 15, 16, 20%. We’re not so sure we we think that positioning for broadening thinking about other asset classes is wise in addition to large cap stocks.

Caroline WoodsSo what’s your best advice for investors right now, especially as they think about navigating some of the choppiness that we’ve already seen. And we’re only in the first month of the year?

Phil NeuhartYeah. Look, if you’re an investor and you look at a day like today, which the market is selling off, again, it’s not something of incredibly great.

Caroline WoodsThe S&P is still only, what, 2% away from the all time highs. So are these the dips that they should sign.

Phil NeuhartYeah. So when you look at this this is not really a sell off. It might just be a little bit of volatility. But if this is enough to give an investor pause and panic then I think you really need to look at your overall allocation. Right. That is an indication of a problem. Equities are a long term asset class. If you’re looking at equities as a short term that that might be problematic. That’s why we have short term fixed income. That’s why we have cash. There are other places to be. If you view equities as hey this is a multi year investment, a little bit of noise is something you can look forward to or look through, I should say. And that’s what we emphasize to our clients.

Caroline WoodsHow should investors be thinking about cash this year. Because yeah single digit upside I mean my online savings are bank are paying 5%, but they’re paying what, 3.7 maybe 4%.

Phil NeuhartRight. Look, look the Fed’s cut 1.75% since late 2024. So your cash is not yielding what it once was. But there is still yield there. I think you have to think of that as as short term needs. That’s what cash is. We have encouraged for, for years now knowing that the fed was going to cut, we’ve encouraged for longer term assets to extend duration by some fixed income, right. Lock in some yield. And there’s still the ability to do that. Right. You can still do that. Assuming that the yield on money markets is going to be there forever, we don’t think is is wise. The fed we think the bias is still cutting probably the back half of this year, meaning those yields are going to come down.

Caroline WoodsAnd just dig in a bit more into where some of those good opportunities in fixed, actually fixed income actually are. Where are you finding the best yields.

Phil NeuhartYeah. So so first of all, we we prefer investment grade spreads are pretty tight and we just don’t see the juice being worth the squeeze and lower quality. So we like quality investment grade where we are investing in both treasuries and corporate. So to be clear we’re fairly duration neutral. We do not have a major duration bet on, long term yields have certainly moved higher. You don’t want too much exposure to to that duration risk. So we find really across the yield curve there is opportunity. But on the corporate side our fixed income team is very focused on security selection at periods like this. With spreads tight, you don’t want to chase risk.

Caroline WoodsOkay. So we hit on fixed income. You want that in your portfolio, you hit on tech. You want that. You want exposure to international markets, not necessarily emerging markets. Pretty diversified here, right? What’s one area that more than one area that you would avoid right now?

Phil NeuhartYeah. Look, we I mentioned we were underweight emerging markets. We’re also underweight large cap value. We’re overweight large cap growth large cap value. When we look at fundamentals sales etc. not quite as robust as large cap growth. This has been a change in the marketplace over recent years is where a lot of the quality is actually in growth less than the value, which is not always more so than value, which is not always been the case. So really our major underweight underweight emerging markets underweight large cap value. Otherwise we’re either overweight or kind of neutral.

Caroline WoodsWhat’s the biggest risk to the market right now.

Phil NeuhartYou know what are people not thinking about? I think there’s a couple things. On the positive side. We were talking lot of negatives when there’s a sell off, I don’t think you’re a lot of people actually talking about the risks of the bull case. Right. You in a period in which markets have been up, there’s a lot of focus on what the risks are to the downside. There is risk to the bull case. And we’re guilty of this, by the way.

Caroline WoodsRisk that you could miss out. Yes.

Phil NeuhartThere could be upside. On the downside, which I think is the tenor of your question, it’s consensus. And our base case is that we’re entering more of a disinflationary environment. Right. We have seen CPI come in. What if that is one time? What if we see a re acceleration. We’re talking about trade in tariffs. If we see an acceleration in inflation I think that would have implications for longer term yields and for the fed and thereby risk assets. Not our base case, but something that I just don’t hear much talk about anymore is what if inflation remains sticky and even re accelerates.

Caroline WoodsAnd what would make you more bullish.

Phil NeuhartWould make me more bullish? One estimates for 2026 or quite high. If you look at Sp500 earnings estimates higher than than 2025. If we hit those numbers, that makes me feel really good because that means margins are expanding. Also, what is happening outside the Magnificent Seven? Seeing the 493 perform, seeing the Equal-weight S&P outperformed the cap weighted. I feel good about that. I like seeing small cap outperform. We cannot be just mega-cap companies. We need to see expansion outside of that. So some of what we’re seeing early this year that that makes me feel pretty good is really hitting numbers. But we’re seeing growth outside of just those largest names.

Caroline WoodsOkay. We’ll leave it there. Phil, really appreciate your insights. Thanks so much.

Phil NeuhartThanks for having.

Caroline WoodsMe. That’s Phil Neuhart, senior director of market and economic research at First Citizens Bank.