A Huge Opportunity Overlooked by the Market? Experts: Small and mid-cap US stocks are experiencing a "once-in-a-lifetime" market trend

Richard Bernstein, Chief Investment Officer of asset management firm Richard Bernstein Advisors, brings good news to investors: the US stock market may be on the verge of a huge investment opportunity - and this opportunity may not be in the market sectors that investors expect. He believes that while the "Magnificent Seven Sisters" have dominated the rise of the S&P 500 index in 2023, less prominent stocks now have the potential to generate high returns over the next 10 years.

Bernstein states that the upcoming swing in market leadership represents a "once-in-a-generation" buying opportunity, with areas that have been forgotten and unpopular in the market brewing. He believes this is similar to the situation in the first decade of this century when the market value of the largest stocks in the S&P 500 index shrank, while weak sectors such as energy and emerging markets achieved "enormous returns."

In a recent report, he wrote, "Despite increasing profits, investors continue to focus on the so-called 'glamorous' stocks. This narrow leadership seems completely irrational, and their extreme valuations suggest that there are once-in-a-lifetime investment opportunities beyond these seven stocks."

So, what makes this different from other periods of changing market leadership?

Bernstein, who was formerly the Chief Investment Strategist at Merrill Lynch, says that his expectations for stock market prosperity should not be confused with the two-year rebound in the market, which was mainly driven by the so-called "post-pandemic beneficiaries," similar to the current "Magnificent Seven Sisters." His argument depends on the broader market being boosted by economic resilience and soaring corporate profitability.

"Are there really only seven growth stories in the entire global stock market? And then, is it really true that these seven companies are the fastest-growing companies in the global stock market? The answer to both of these questions is no," Bernstein said.

In the 12 months ending October 15th, Amazon was the only stock among the seven tech giants to make the list of 130 US companies with at least 25% profit growth.

Meanwhile, profits of other companies in the market are rising, allowing investors to abandon super expensive large-cap stocks and turn to more attractively priced stocks. Data from the MSCI All Country World Index shows that corporate profits hit bottom in 2023 and will rise in 2024.Bernstein added, "As growth begins to accelerate, the significance of paying a premium for growth becomes less and less. History has shown that as economic growth becomes more abundant, investors will compare economic growth and therefore turn to broader and cheaper markets, which seems consistent with history."

Bernstein pointed out that as investors flock to more attractive market sectors, such as small-cap and mid-cap stocks, the massive gains in large-cap stocks will be weakened. In his view, over the next 10 years, the market capitalization of the "Magnificent Seven Sisters" will evaporate by 20% to 25%, while a 20% to 25% increase in the Russell 2000 index is very realistic. Bernstein said, "On the other side of the seesaw, they are very frustrated, and you can get huge returns. Richard Bernstein Advisors has increased its holdings in stocks in almost all areas of the market, except for these seven companies."

Bernstein is not the only one with a bullish view. Other forecasters have also pointed out that the overall market will rise significantly. Bank of America, Deutsche Bank, and Fundstrat recently predicted that the S&P 500 index will reach new historical highs again.