Kara Murphy

Earnings growth will accelerate among smaller and midsized companies in the second half, and with lower starting valuations and the Fed rate hike off the table, these stocks should deliver improved performance.

Valuation spreads between the U.S. and the rest of the world are at extreme levels, and earnings are starting to accelerate outside the U.S. as well. This creates an opportunity for international diversification, even though the U.S. has outperformed for 15 years. Long waves suggest periods of U.S. underperformance are likely, so maintaining exposure outside the U.S. is important.

The market is shifting attention to areas like industrials that are beginning to show earnings power and have more attractive valuations. As geopolitical headlines recede, the market refocuses on pre-conflict trends, favoring sectors with solid earnings and reasonable prices over the expensive mega-caps. Industrials are positioned to benefit from the broadening out of market performance and capital rotation. An escalation in the Iran conflict could reverse the "broadening out" trade and cause a flight back to mega-cap tech.