The days of socking of your money into the S&P 500 and forgetting about it might be in the rearview mirror.
That’s according to Richard Bernstein, a longtime strategist and the chief investment officer of Richard Bernstein Advisors.
Speaking to Business Insider this week, the portfolio manager said he’s concerned about a possible “lost decade” for the market’s most popular investments — particularly for tech-heavy, growth stocks.
He thinks those investments are likely to underperform for the foreseeable future, thanks to a more challenging economic backdrop, His bearish outlook includes the S&P 500, the benchmark index that has grown more tech-heavy in recent years amid AI hype.
“Remember, there was a lost decade after the tech bubble in 2000. The S&P did nothing,” Bernstein said, referring to how the benchmark index saw meager returns in the years following the market trough in 2002.
Bernstein, whose firm manages $19 billion in assets, said investors should skew their portfolios towards investments that tend to perform well in inflationary environments.
He outlined a few reasons why he thinks the shift is underway:
1. The US economy looks like it’s headed for a ‘guns and butter’ era
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The US economy looks like it’s entering an inflationary regime similar to what transpired in the 1960s, Bernstein noted, a period he described as the “guns and butter” era.
During the 60s, the government spent heavily on defense, which raised concerns about the deficit. Ultimately, the spending contributed to hotter inflation and slower growth in the 1970s, which morphed into stagflation as oil prices saw an unprecedented spike.
The US isn’t spending as heavily on defense as it was during the Vietnam war, but the same concerns about the deficit are still hanging in the background, Bernstein said, pointing to tax cuts and fiscal stimulus in President Donald Trump’s One Big Beautiful Bill.
“You can’t say it’s not going to affect the deficit,” he said. “I find it curious that we’re getting a sort of modern day ‘guns and butter,'” he added, speculating that inflation would likely heat up over the coming years, while real GDP growth slowed or remain stagnant.
Inflation concerns have also been stoked by the recent oil price spike, with Americans already paying more at the pump.
Concerns of stagflation — a scenario where inflation remains hot while growth slows — have also picked up over the last month.
2. Tech is a vulnerability for the market
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Concerns about high valuations in the tech sector have added to the market’s collective anxiety. The Magnificent Seven — a group of tech giants at the heart of the AI trade — now make up around a third of the S&P 500.
A large part of the frenzy has been fueled by the billions tech giants are spending on AI, though monetization plans for some firms remain unclear.
Some forecasters have floated a possible stock correction that could rival the dot-com bust. Bernstein, for his part, has warned of the market’s concerning parallels to the 1990s for years.
“Hedge funds can basically short the Mag seven and buy anything else and they might look smart,” he said of how firms might react to a lost decade in the market.
Where to hide
Bernstein had a few ideas for how investors should construct their portfolios. Here are the assets he’d recommend for investors looking to nab the best returns in a high-inflation environment:
1. Value stocks
Value stocks outperformed growth stocks in the 60s and 70s, Bernstein said.
“And we know that investors are massively overweight growth relative to value right now,” Bernstein said.
The group has also pulled ahead of the S&P 500 so far this year. The Vanguard Value Index Fund ETF is up 2% year-to-date, compared to a 4% loss in the benchmark index.
2. Small-caps
Smaller companies also outperformed during the 60s and 70s, Bernstein said.
Flows into small-cap stocks have also been “insignificant” in recent years, his firm wrote in a note this week, suggesting that investors were underexposed to the sector.
The Russell 2000 has struggled amid the broader market sell-off this year, but has outperformed the S&P 500 over the past 12 months. The small-cap index is up 32% over the last year, compared to the S&P 500’s 21% gain.
3. Short-duration and cash
Short-duration and cash investments tend to outperform during inflationary periods, Bernstein noted. That’s because, when inflation is high, the market places a premium on cash that can be accessed in the present.
He pointed to how money market funds “dramatically” outperformed long-term bonds during the 60s and 70s.
“I’ve got a 20-year investment or a 10-year investment, but that doesn’t do me any good today when I need to buy groceries,” he said, adding that RBA had raised its allocation to cash since the start of the Iran war.
4. Dividend stocks
“In the equity market, you want dividends because you want as much cash flow upfront as you can possibly get,” he said of dividend stocks being attractive.
5. Gold
Gold didn’t overperform during the inflationary environment of 60s, but it didn’t underperform either, Bernstein noted.
He said he believed investors keeping a small portion of their portfolios in gold was a good idea, and added that his firm had allocated around 5% to the metal itself.
Bernstein floated one portfolio configuration where investors have 60% of their wealth invested in value, dividend, and non-US stocks, while 40% was invested in short-term bonds.
“You might do very well over the next five to ten years,” he said.
