Even after a year of stellar performance, energy remains the best sector for investors with a five- to 10-year time horizon, RBA Advisors’ CEO and founder Rich Bernstein told clients on a webcast yesterday.
Growth for energy companies is projected to be twice that of technology stocks, noted the widely watched Bernstein, who spent two decades at Merrill Lynch, where he was named Wall Street’s top market strategist more than 15 times. Moreover, in a world where income is very important, the sector sports the best dividend yield of all 11 industries in the S&P 500, he noted.
This outlook remains consistent with the paradigm shift that RBA has been forecasting for more than a year. Bernstein views the shift away from technology shares as part of a secular decline in long-duration assets, including venture capital and long-term bonds, as well as persistently higher inflation than markets expect.
Ingrained expectations that the slow-growth, low-inflation environment that characterized the era after the Great Recession continue to prevail in the minds of many investors. Even though growth rates for energy companies are projected to vastly exceed the pace of technology companies, “people can’t believe it,” Bernstein said.
Investors may justifiably be skeptical of analysts’ estimates. But “why believe tech analysts are worse than energy analysts,” he said.
Whether one believes analysts’ predictions, one thing is certain: Earnings across most industries are likely to decelerate over the next year, he said. So far in the most recent quarter, S&P 500 earnings are coming in 25% higher on a trailing quarter basis, Bernstein said. That sets up many companies for “hard comparisons” going forward, he said.
Furthermore, the U.S. dollar is up 15% this year, creating a headwind for the big multinationals that dominate the indexes. A strong dollar is often “a historical sign of a profits recession,” Bernstein said. “But we are not even there yet.”
RBA also maintains that the Fed is earlier in its tightening cycle than many optimistic investors want to believe. The real inflation-adjusted Fed fund rate is almost minus 7%, Bernstein said. Throughout history it has averaged about a positive 1%.
Despite favoring the energy industry for the next five to 10 years, RBA currently is overweight more defensive names like consumer staples, healthcare and utilities. “We think the rally we’ve seen [recently] in growth stocks is a head fake,” Bernstein told clients.
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