Is It Time to Be Max Bullish?

Investors must separate allocation from selection

The distinction between equity allocation (what percentage of the portfolio should be held in stocks) and equity selection (which types of stocks to hold) is a critical component to portfolio construction. Currently, we are broadly bullish in our outlook for most sectors and regions of the market, but we do not view it is the appropriate time to be max overweight stocks as an asset class.

Corporate profit growth is accelerating and broadening

Perhaps the most important near-term support for the stock market is the ongoing acceleration of corporate earnings. Earnings growth has been accelerating since the end of 2022, and we forecast further acceleration over the next several quarters. Not only is growth accelerating, but critically, it’s also broadening out (Chart 1).

percentage S&P

Stocks have strong near-term support from earnings, but this is not 2010

Accelerating profit growth and ample liquidity strongly argue for investors to be overweight cyclicality within their portfolios, particularly in the areas of the market likely to generate superior earnings acceleration in the coming quarters. While this has also historically been a good time to be overweight stocks, there are other considerations that play into the asset allocation decision:

  • Selection vs. allocation: Historically, it has paid to separate the asset allocation decision from the equity selection decision. During the past three cycles, the optimal time to rotate away from the cycle’s dominant leadership has been anywhere from eight months to four years removed from the optimal time to go all-in on equities.

1. The Late 80s/Early 90s: The time to shift equity selection away from Japan and toward the rest of the world was around the peak of the Japanese stock market bubble in November 1988 after which Japan drastically underperformed other equity markets. However, the ideal time to be max weight in one’s equity allocation as a whole was much later, in January 1993 (Chart 2). While stocks did rise between 1988 and 1993 with some parts of the equity market doing quite well (i.e. defensive US stocks), the bond market trounced the broad global equity markets during this period (59% vs. 10%). (See Chart 3)