A looming AI disappointment and rising yields. Why one research firm is hitting the brakes on U.S. stocks.

By Nora Redmond

The time is right for exposure to emerging markets, Japan and the eurozone, says MacroResearchBoard

MacroResearchBoard sees semiconductor stocks taking a hit, a year or so from now.

Technology stocks are currently calling the shots for U.S. equities, but investors are likely facing a big test in the next 6 to 12 months, according to investment strategy firm MacroResearchBoard

Peter Perkins, strategist at the Montreal-based research group, holds that U.S. equities and technology stocks are in a bubble. He said they see "greater odds of investor disappointment than positive surpises in the year ahead," in a note to clients that published July 2.

"Gauges of investor sentiment underscore that current capital market pricing already reflects significant economic optimism and further upside for stocks versus bonds," he wrote. "The test for technology stocks, and semiconductors in particular, looms."

As is generally the case during market booms, the driver is high liquidity, which can be observed in the growth of money supply and increasing private sector credit, but mainly in the "continuous low cost of capital compared to returns." This has especially been the case since the 2008-09 global financial crisis, with central banks keeping interest rates much lower than the rate at which economies are growing, Perkins noted.

In up to a year or so, risk assets, especially artificial intelligence stocks, whose profitability is expected to rise far into the future, may suffer when central banks raise rates and bond yields move higher, he said.

"We recommend overweight exposure to emerging markets, Japan and the euro area within a global equity portfolio, with a mild underweight in the U.S.," MacroResearchBoard advises.

If levels of transit through the Strait of Hormuz normalize, as the firm forecasts, growth conditions are likely to improve in the eurozone, Japan and a number of emerging markets - allowing a chance for non-U.S. earnings to regain ground relative to U.S. companies, Perkins wrote.

The firm is also overweight cash and neutral weight on stocks within a multi-asset portfolio. For bonds, it's underweight and recommends short-duration options, like the 2-year Treasury note BX:TMUBMUSD02Y, over their longer-term counterparts.

Perkins added that it predicts the dollar's growth differential will narrow within the next 12 months as Asian and European economies - hit more heavily by the energy shock - begin to recover. The euro (EURUSD), the yen (USDJPY), the Singapore dollar (SGDUSD) and the currencies of other emerging markets are all more attractive now.

"We expect commodities overall to perform in-line with other risk assets, thereby warranting a neutral stance within a multi-asset portfolio," he said, with a preference for base metals over oil or gold because of their usage in the buildout of data centers.

-Nora Redmond

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