CIO calls a new phase in the market, says a ‘healthy’ rotation has begun

Stock markets have entered a new phase that will involve a broadening of last year’s bull market as big U.S. tech stocks come under pressure, according to the CIO of a Swiss private bank.

Charles-Henry Monchau, chief investment officer at Bank Syz, told CNBC’s “Squawk Box Europe” on Monday that last week marked the start of what will become a “healthy” rotation.

The so-called “magnificent seven” stocks — Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla — now represent around 30% of the entire market cap of the S&P 500 index, having enjoyed a remarkable rally in 2023.

But markets had a tough start to 2024, with the U.S. benchmark index snapping a nine-week winning streak as mega-cap tech stocks, particularly Apple, underperformed.

Bank Syz’s Monchau said he expects the U.S. to experience a “technical recession without going through a hard landing” in the first half of this year, before then beginning a recovery.

“What we saw last week was very interesting in the sense that we can indeed have some of the winners of last year being under pressure, whereas the market still looks like a bull market because you have other parts of the market which are coming back — and here I’m talking about the laggards of 2023 like financials, for instance, energy or even healthcare,” he said.

Monchau suggested that some of last week’s weakness might also be down to a moderation of the excessive “euphoria” that drove the surge in stock markets during the final two months of last year.

“Now remember, we had a tremendous end of the year in 2023, the market maybe went a bit ahead of itself, now it’s pulling back, and because of the large weights of these big stocks … obviously they are under pressure now that we are seeing some, let’s say, profit taking on these long positions,” he said.

“But again, what I think is very healthy is to see some other parts of the market taking part in the bull market. This is what we want to see — a broadening of the upside participation. This was lacking clearly last year, and now it’s starting to look like something which is indeed working.”

These views were somewhat echoed by Scott Wren, senior global market strategist at Wells Fargo. In a research note late last week, Wren highlighted that the Wall Street giant’s investment focus had throughout 2023 been focused on large-capitalization U.S. equities with reliable earnings streams and cash flows, along with strong balance sheets.

However, he expects that to shift toward more cyclical asset classes and sectors that are better positioned to lead out in an economic recovery later in the year.

“Pegging the precise timing of an economic slowdown is always difficult, but the economy is clearly slowing, and we expect, first, a bumpy stock market ride in the midst of slowing economic growth followed by a recovery that takes hold in the second half of the year and into 2025,” Wren said.

“As the economy continues to slow, we suggest that investors reallocate funds from the richly valued Information Technology, Consumer Discretionary, and Communications Services sectors toward our current favorable-rated Industrials, Materials, and Health Care sectors.”