EDITOR NOTE: When the broader market rallies, we often take it as a sign of economic strength, a leading indicator signalling strong corporate profits ahead. But we have to stop for a moment to see just how “broad” the advances really are. According to this author, the current rally is showing quite a few worrisome signs. Getting to the point, the current surge is led by tech. Compare that with the Russell 2000, which is a strong proxy for small cap businesses across the board, the “broader economy” is flat. Is tech getting way ahead of the economy itself? Isn’t that exactly what happened in the late 1990s? And what might we expect of the broader market in the months ahead?
Institutional Investor Hall of Famer Richard Bernstein sees troublesome activity within the market surge.
His problem: Big Tech is the main driver.
“Narrow leadership is an end-of-cycle event,” the Richard Bernstein Advisors CEO and CIO told CNBC’s “Trading Nation” on Thursday.
According to Bernstein, it’s a compelling reason to get cautious.
“You want it to be the exact opposite,” said Bernstein, who has spent decades on Wall Street and ran strategy for Merrill Lynch. “Early cycles are dominated by broad market leadership.”
He uses the tech-heavy Nasdaq’s outperformance versus the Russell 2000 as a harbinger — referring to it as a dramatic and “very bearish sign for the economy and corporate profits.”
In a special note to CNBC, Bernstein wrote ”... narrow leadership isn’t a sign of economic or profits strength. If it’s broader leadership (value, cyclicals, small caps) then I think the rally has longer and stronger legs.”
Bernstein is still underweight technology, including the year’s high-flying momentum names. And, in March 2019, he warned on “Trading Nation” that investors appeared to be getting dangerously swept up in what could turn into another dot-com bust.
Now, he is adding regulation and antitrust risks to his bearish case.
“On the regulation, antitrust side, I think people are being a little short-sighted here,” said Bernstein. “Big Tech is just a giant bullseye for any politician right now. It’s an easy target, and you’re really not going to upset too many people.”
He sees Republicans targeting many of tech’s most popular companies over free speech conflicts while Democrats go after perceived monopolies. So, it wouldn’t matter which party is in the White House.
“That’s a theme that everybody should be thinking about,” Bernstein said.
Originally posted on CNBC