Should Stock Investors Look Beyond the Tech Giants?

At the same time, the stock market, especially in the US, has been unusually concentrated around a handful of large technology companies. That “can be due to the success of a few large companies that manage to dominate specific sectors, as we have seen in recent years in the US technology industry,” Oppenheimer writes. Even so, higher concentration may be a risk for investors.

“Faced with more limited opportunities to diversify through bond exposure, we think equity investors should focus on diversification both within the technology sector and across industries.”

How will higher interest rates affect the stock market?

During recent major bull markets, interest rates and the cost of capital were declining. But in this cycle, longer-term bond yields have been rising as their fixed income becomes less valuable in a world of potentially higher inflation. Rising government debt levels are also increasing the return that investors are demanding to fund government deficits.

“Even in Japan yields are rising after decades of deflationary pressures, while the shift in fiscal spending is also resulting in a rise in interest rates in Germany,” Oppenheimer writes.

Declining bond yields have helped fuel other major bull markets, again suggesting lower equity returns going forward amid elevated interest rates.

How reduced globalization will impact financial markets

Global trade, meanwhile, is under pressure. That’s a reversal from the period since the late 1980s, when globalization was increasing. Now, a trend towards less global economic integration and higher tariffs is slowing world trade growth.

As a consequence, specialization may become more important. While higher US tariffs might slow demand, China is likely to remain a formidable competitor, as its factories boast large economies of scale and have huge cost advantages. This combination will make it harder to compete for emerging markets with a high share of exports to GDP, as well as for many economies in Europe.

“Investors should focus on countries and companies that can specialize and dominate in their export markets, particularly in services, to offset the impact of more high-end Chinese manufacturing competition,” Oppenheimer writes. He points out that higher tariffs and a weaker dollar, coupled with more fiscal support and localization, also point to investment opportunities in domestic-focused companies that have a dominant position in their respective markets.

Will AI cause stock returns to rise?

As companies race to develop AI, the technology is likely to disrupt the labor market and the internet. This will challenge existing business models while also boosting productivity and the development of new products and services, according to Goldman Sachs Research.