Bob Doll: Move to Conservative Holdings Now

Doll noted that:

• The U.S. yield curve is its least inverted in two years, which usually happens just before a recession.
• The economy is slowing, showing small cracks, and it’s unclear yet whether there will be a soft or bumpy landing.
• Earnings estimates for this year’s second half are being revised lower, while big tech valuations are declining.
• Small-cap stocks are outperforming the S&P 500 since in recent weeks, which typically happens early in economic expansions; given the cycle’s late stage, Crossmark cautions against chasing these gains although cheap valuations may offer some cushion.
• Investors have been pricing in a Donald Trump victory but the race is changing now that Kamala Harris is the presumptive Democratic nominee; Crossmark expects temporary cooling in the “Trump trade” (with investors moving out of megacap stocks and into small caps and energy shares, for instance), but Republicans remain the slight favorite to win the election.

For the past 18 months, “unbridled optimism” over artificial intelligence has driven tech stocks, but now cracks have developed in the narrative, causing “major turbulence” for these stocks in recent weeks, Doll wrote.

High earnings expectations and rich valuations suggest further downside potential, he said.