Transcript:

Caroline WoodsMy next guest says, this wall of worry is actually a staircase to new heights. Joining us is Brian Levitt, chief global market strategist at Invesco. Brian, always good to have you. Thanks. Always being.

Brian LevittBack here. Thank you.

Caroline WoodsAll right. So first things first. What kind of new highs are we talking about. Are these modest gains that you’re expecting something more meaningful?

Brian LevittI think we’re going to have a substantial gain in the S&P 500 this year. I mean, I’m not saying that we’re going to have a fourth year of 15, 20 plus percent, but but the markets are likely to continue to move higher. And it’s a very nice backdrop. I mean I know that there’s a lot of uncertainty. You talk about the wall of worry.

Brian LevittBut actually leading indicators of the global economy look fine. Fed wants to cut interest rates. There’s a lot to like about these markets.

Caroline WoodsSo I know you don’t have a crystal ball but substantial gains but maybe not 15 to 20%.

Brian LevittI mean 10 to 15% is almost a cop out because that’s average okay. Right. But earnings growth is about to be there may be a little bit difficult to get significant multiple expansion across the broad market because you’re already starting in elevated position. The market is already considered a 3% fed funds rate. So it might be hard to get the multiples up significantly.

Brian LevittBut earnings growth is likely to continue to be strong.

Caroline WoodsSo dig into that a bit more. Just the solid fundamentals that will get us to these new highs. What makes you so confident. Because this doesn’t feel like a market that even though we’ve reached new highs already this year, it doesn’t feel that confident.

Brian LevittIt doesn’t feel that confident because you’ve had a sector that was a significant part of the advance over the last few years, that is now down something like 20%. Of course, being the software sector and so it’s brought down the tech sector as a whole, which we’re not used to. Now, of course, there’s components within the tech sector that have done okay.

Brian LevittSemiconductors prior to Nvidia‘s announcement, on its earnings this quarter, had been doing quite well as well. So you’re that came down a little bit. But in general, the tech sector is not a monolith. It’s just down modestly. But with the software companies down, it’s it’s created concern for investors. But if you look at more cyclical parts of the market, you look at energy, materials, industrials.

Brian LevittThey’re doing quite well this year. Non-U.S. is doing quite well this year. So the irony is this is what investors were begging for in 2024 when it was only seven companies doing well or what investors were worried were hoping for at the end of 2025. When they’re saying it’s an AI bubble, it’s too concentrated, you’re getting this broadening out.

Caroline WoodsI think we wanted a broadening out, though, including the tech sector. Yeah.

Brian LevittWhy not. Right the time. Yeah.

Caroline WoodsDo you expect this to continue to be the case that tech will be the underperformer or does it eventually catch up this year.

Brian LevittWell, you’ve already I mean the nice thing is you’ve had software stocks which were trading at 35 times forward earnings are now back to around market average. Right. And so my expectation is that that’s going to bottom. And I think some of the concerns about AI will start to fade. Recognizing that these software business models are not destroyed.

Brian LevittOver the near term. And then semiconductor side should continue to benefit from improving economic activity and all this investment. But what’s really interesting for investors. So while the tech sector can do okay in this backdrop, other parts of the market can also provide a lift. Because you weren’t a better macro backdrop. You you are in an environment where the fed is slowly, gradually easing interest rates.

Brian LevittAnd that just creates a different picture than where we had been for a long time.

Caroline WoodsWould you be comfortable buying or recommending SAS companies right here? You said you think it will bottom but has it bottom.

Brian LevittI want you I mean investors should be selective. Think of it on a case by case. But yeah, you’ve already seen a very significant decline without meaningful disruption in the business models. You’ve seen decline amid expectation of disruption at some point in the business models. I think it’s overstated.

Caroline WoodsAnd that disruption you don’t think is going to happen over time.

Brian LevittYou’ll see an evolution with it. But I think you’ll see these software companies taking more advantage of AI rather than, you know, disappearing as a result of AI.

Caroline WoodsSo that’s the software side. And then there’s the magic seven, I guess, you know, Microsoft could be in the software side, but the magic seven has also been underperforming this year. Do you look at that? Is the magic seven is a thing of the past. And it will stop clumping those names together and stop talking about it. Or do you look at that is still really a solid place to be.

Caroline WoodsThat should be part of the portfolio.

Brian LevittYeah, over an intermediate term that should continue to be part of a portfolio. I think it will underperform, for 2026, as the market looks to more economically sensitive parts of the market, which we’re already seeing. And the challenge you have now in the magnificent companies or really the hyperscalers, is that they were all somewhat monopolistic. They were light investment.

Brian LevittAnd that changes now. So they’re all competing in the same space. They’re all making significant investment. And it’s going to be some time before winners and losers are identified. And some time before we understand where revenue comes from versus investment. So the market is taking a pause on this. Those companies aren’t cratering because they’re very well-run businesses. There are cash flow generative businesses.

Brian LevittThey’re not over levered. But the market’s taking a pause on it now until there’s a better understanding of what the winners and losers are going to be.

Caroline WoodsSo if you have money to put to work right now, where do you want to put it?

Brian LevittWell, I would be looking at broader exposure in the US still. So that would be more like an equal weight or mid-cap value oriented parts of the market. And I would be looking to non-U.S.. Now, a lot of investors, you know, when they say, oh, you’re overweight, non-U.S., you know, to that most of them are 0%. So let’s think of that ten, 20% exposure to non-U.S. because you’re in an environment now with the Fed’s easing, the dollar should be weakening from what are still relatively lofty levels.

Brian LevittNotwithstanding the 10% decline in you saw on the dollar last year. And as that happens, capital starts to flow to other parts of the world where valuations are more attractive. And if you look historically in periods where the dollar declines, the emerging markets and the developed world ex-u.s. actually outperform. The S&P 500 doesn’t do poorly. But but those parts of the world outperform.

Caroline WoodsSo non-U.S. meaning where.

Brian LevittFor first and foremost, the emerging markets, emerging markets benefit most from a weaker dollar environment. And then I would say, you know, people ask well, Europe to we if we want to be significantly exposed to the reality is that expectations had gotten quite weak in Europe. And what you’ve had now is pretty significant policy easing, more fiscal support coming.

Brian LevittSo it’s unlikely that the European economy will surprise to the upside. Markets don’t trade on whether things are amazing. They trade on whether things are better or worse relative to expectations. And and Europe is well positioned for that.

Caroline WoodsAnd I know you can’t speak individual stocks, but equal weight is pretty broad. Can you dig into specific sectors that you like, specific areas of the market?

Brian LevittIf so long as we think the global economy is recovering or expanding in a policy environment, you want to be more cyclical. And so those are your industrials, your materials, your energy. And you know, these are the types of calls we were making in October November when we were writing 2026 outlooks. And it’s been a good first two months to the year for that call.

Brian LevittAnd you know, I’m always mindful you don’t want to talk to a pitcher during a no hitter in two months. Don’t make a year. But as long as leading indicators continue to point higher globally, as long as inflation expectations are contained and the Fed’s going to move rates lower, cyclical parts of the economy should benefit from all of that.

Caroline WoodsIs this the year of the Dow versus the year of the S&P so.

Brian LevittFar so far.

Caroline WoodsRussell versus those.

Brian LevittTwo. Yes. So you’ve had quite a move in in the Russell 2000. So the Russell 2000 should continue to benefit from this I would say where you’ve been mid-cap, you haven’t seen the bit within the mid cap to the same extent that you saw on. So mid-cap stocks look like a, you know, a so-called sweet spot with regards to this.

Brian LevittSo yeah, it’s a year in which everybody else gets a chance to catch up. People were bemoaning the fact coming in here about valuations that was really just an S&P story.

Caroline WoodsSo what about all those people who are looking at some of the pullbacks that we’ve been seeing, especially in some of those high fliers. And thinking is now the time to buy the dip? What do you say to.

Brian LevittYeah, if you have an intermediate term time period and you’ve got good growth, businesses that are trading now at market valuations. Yeah, it’s a good time to do that. It doesn’t mean they’re necessarily going to outperform in 2026. But the opportunity to buy businesses that you believe are strong growth businesses. Yeah. Over the intermediate term time period I would use this type of weakness to build positions in it.

Caroline WoodsAnything you’re avoiding.

Brian LevittWell, there’s certain things that have rallied that have caused me to scratch my head a little bit, given everything else that I’m saying. So if I think about treasuries, if I think about gold, those are giving you different indicators than everything else I’m saying. So there’s some crosscurrents here. You know, if I like cyclical stocks and small or capitalization, why is why aren’t gold and treasuries rallying?

Caroline WoodsBut why was gold hitting new highs at the same time as the stock market. It seems like it hasn’t really followed.

Brian LevittIt hasn’t followed. I mean, some of that’s the central bank diversification. Some of that is just it got caught up in a momentum trade. Some of it’s the geopolitical risks around Iran and other things. So I don’t love precious metals here. I don’t love treasuries here. Those are the types of things that I would be avoiding.

Caroline WoodsCrypto.

Brian LevittCrypto seems like a tech trade. It seems like a levered play on tech. Yeah. I’m I’m challenged to think about how we value crypto. But if you’re a fan of crypto, it’s certainly off quite a bit. And if it’s a lever play on tech, I think over the intermediate term you could be okay there.

Caroline WoodsIf this is the year of the Dow, when do we see Dow 60,000?

Brian LevittI mean, the funny thing is it hasn’t been the decade of the Dow or the 15 years of the Dow. But we we get to these new milestones every handful of years. And yeah, I was laughing when Pam Bondi was talking about Dow 50,000. I mean we were Dow 40,000 under Biden. We were Dow 30,000 on their first Trump term.

Brian LevittWe were Dow 20,000 under Obama. So we should have made markets over our life.

Caroline WoodsSo when is Dow 60,000?

Brian LevittI don’t know, one Dow 60,000 is. But but I would say within the next year or two you could be a Dow 60,000.

Caroline WoodsOkay. On that note. Time to switch to our rapid fire round of this or that. I know you know how to play. Are you ready to do this?

Brian LevittReady to do.

Caroline WoodsIt. All right. Dow 50,000 psychological top OR A new floor.

Brian LevittNo, it’s not a psychological topic.

Caroline WoodsValuations justified or stretched.

Brian LevittA little bit stretched but okay given the macro environment in the policy.

Caroline WoodsEnvironment earnings growth durable or peaking.

Brian LevittDurable.

Caroline WoodsEqual weight S&P catch up trade or head fake.

Brian LevittCatch up free.

Caroline WoodsMarket breath in proving or illusion.

Brian LevittImproving.

Caroline WoodsThe AI trade. Overhyped or underappreciated? Underappreciated U.S. equities buy the dip or diversify abroad. Both trying to tricky their.

Brian LevittAdd.

Caroline WoodsOn weakness or sit tight.

Brian LevittAdd on weakness.

Caroline WoodsLarge caps, leadership continues, or passing the baton to small caps.

Brian LevittPassing the baton probably more to the mid space. Here.

Caroline WoodsSaaS stocks value reset or value trap.

Brian LevittValue reset.

Caroline WoodsThe dollar cyclical dip for a structural slide.

Brian LevittStructural moderation. So I work.

Caroline WoodsSure the fed real tailwind or persistent headwind.

Brian LevittReal tailwind.

Caroline WoodsRecession risk fading or delayed.

Brian LevittFading.

Caroline Woods2026 outlook acceleration or normalization.

Brian LevittAcceleration.

Caroline WoodsOne sentence to describe how you’re feeling about stocks this year, I’m.

Brian LevittFeeling optimistic. I know it’s hard for me to not like stocks in a world where the economy’s doing fine. The fed wants to lower rates. Inflation expectations are contained, gasoline prices are in elevated. The dollar’s weakening. All of that is supportive for risk assets now.

Caroline WoodsBullish elevator pitch there Brian Levitt always a pleasure.

Brian LevittThanks so much. Thank you.

Caroline WoodsThat’s Brian Levitt global chief global market strategist at Invesco.