Still neutral on small caps despite recent rally, says Raymond James CIO Larry Adam
Speakers
Larry Adam
— Chief Investment Officer, Raymond James
Summary
Raymond James CIO Larry Adam discusses why he remains neutral on small caps despite the recent rally, citing repeated downward revisions to small-cap earnings estimates. He is more cautious on the S&P 500 than consensus because of elevated valuations, crowded positioning, and midterm-election volatility. Adam favors industrials for their growth and would buy technology on weakness, while turning more cautious/neutral on financials and staying overweight health care.
- Small-cap rally has not changed Raymond James's neutral stance due to annual earnings estimate cuts.
- Adam's S&P 500 target is below consensus because valuations are in the 95th percentile and retail positioning is crowded.
- Midterm election years historically bring higher volatility and muted performance.
- Industrials are favored because earnings are expected to grow 50%, not for dividends or buybacks.
- Technology would be bought on any pullback.
- Financials are viewed more cautiously because good news is priced in.
- Health care is overweight despite headline pressure, with recent non-pharma pricing deals noted.
Ideas
Neutral small caps until earnings estimates improve.
Adam remains neutral on small caps despite the recent rally. He notes that for the past four years, the consensus expected small-cap outperformance based on earnings, but small-cap earnings estimates were revised down by more than 10% each year. Until that optimism converts into actual earnings reality, Raymond James will remain neutral on the space.
Cautious S&P on valuations and positioning.
Adam is more cautious on the S&P 500 than consensus. Raymond James's target is 7,250 versus the consensus 7,600. He acknowledges healthy fundamentals, including above-average earnings growth, margins, sales/revenue, and likely Fed rate cuts, but says valuations are in the 95th percentile, positioning is crowded with record retail equity ownership, and midterm election years historically bring higher volatility and muted performance.
Favor industrials for 50% earnings growth.
Adam favors/overweights industrials because of their growth prospects. He notes the sector's earnings are expected to rise 50% this year. Although the President's comments about restricting dividends and buybacks affected the sector, he says that is not why Raymond James owns it; industrials have a low 1.1% dividend yield and buy back less than 1% of shares, so the growth outlook is the key driver. He would buy industrial weakness.
Buy technology sector on weakness.
Adam would buy technology if the sector is driven lower, applying the same dip-buying approach he uses for industrials. He remains constructive on technology and sees pullbacks as buying opportunities.
Cautious financials; good news priced in.
Adam is more cautious and neutral on financials because much of the good news was already priced in, particularly at the end of last year. He does not treat policy-driven weakness in financials as a clear buying opportunity.
Overweight health care on pricing deals.
Adam is overweight health care. He acknowledges that headlines have weighed on the sector, but says recent pricing deals with non-pharmaceutical companies are an important positive, especially if the deals hold even after being signed. The transcript cuts off before he completes the point.
