Barbell Equity Exposure in ‘24

After a year of multiple driven gains, it’s healthy to question whether stock valuations have gotten stretched. Last year’s multiple expansion did indeed leave markets, particularly the United States, priced at a premium. The S&P 500 currently trades more than 19x forward looking 1 year (FY1) earnings. And unlike last year, when analysts were discounting a recession into earnings estimates, current expectations already bake in earnings growth of more than 10%.

That said, headline valuations are deceiving owing to last year’s other theme: narrow breadth. Outside of a couple of sectors and a relatively small number of growth names, most markets and industries are not priced aggressively. Except for India, virtually every major international market is cheaper than the United States. Japan, much of Europe and most of emerging markets trade at less than 15x FY1 earnings.

A similar pattern holds at the industry level. While much of the information technology sector trades at a premium to the broader equity market, most sectors and industries do not. Not only are most industries trading below the market’s multiple, but more than half are trading at or below their longer-term average valuation (see Chart 1).

A Barbell Structure for a Stronger Portfolio

Last year the best portfolio construction strategy was to build a concentrated portfolio, focused on a few sectors and, ideally, a handful of stocks. This year, with economic normalization likely to be the dominant theme, I would expect more muted but broader gains. Investors should consider paring some of last year’s winners to take advantage of the discounts available in many parts of the market.

To be clear, I am not advocating rotating into shaky markets or impaired, deep value companies. Given the likelihood for some slowing in the economy, this is probably the wrong time to go ‘bottom fishing’. Instead, I would suggest maintaining a somewhat smaller overweight in secular growth names, paired with high-quality value companies in some of last year’s laggard sectors.

What does this mean in practice? Continue to emphasize names and themes exposed to secular trends tied to artificial intelligence, semiconductors, healthcare services and internet commerce. At the same time, consider adding to names in segments of the market that were left behind in last year’s rally, and as a result are trading at a substantial discount. Examples of the latter include energy, autos, airlines, and aerospace and defense. To be clear, this does not suggest abandoning stocks geared to winning secular themes, but perhaps owning a bit less to take advantage of a number of names and sectors that are surprisingly cheap.

Russ Koesterich, CFA, is a Portfolio Manager for BlackRock's Global Allocation Fund and Lead Portfolio Manager for BlackRock’s Global Allocation (GA) Selects Model Portfolios and is a regular contributor to Market Insights.

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