July 2024, In the Spotlight -
Looking ahead, we see opportunities in three areas.
The first is in the democratization of AI.
The market has taken an extremely narrow focus in terms of deciding who is going to benefit from AI.
We believe that the benefits will be much more widespread, and as a result of our work, we firmly believe that the market is significantly underestimating a handful of stocks and the opportunities that they will have.
The second area that we're very excited about is that we believe that the classic value areas of banks and energy are much better positioned for the next decade than they had been for the prior decade.
On the bank side, the companies had survived the storm of 2023 very well.
Capital positions and liquidity positions are very strong in the industry, and we also believe that the stocks are inexpensive.
There's some option value for things that can work out very positively in their favor.
The first is that we believe that there's going to be a significant increase of CapEx[1] and manufacturing investment in the Midwest.
And we believe that that's going to drive loan growth in this cycle.
Additionally, we also believe that there's a bipartisan effort to lessen some of the onerous capital requirements that have lowered the ROEs[2] for the banks.
Finally, the third area is that we believe value in general is very well positioned.
The differential in valuations between value and growth stocks is near all-time wides, and as a result of the fact that we see positive fundamental backdrop for a lot of these stocks—like I mentioned banks and energy—we believe that value is well positioned to outperform.
We're generally very constructive on the US banks and especially on the regional banks.
We believe that the industry weathered the storm of 2023 very well and came out with strong capital ratios, liquidity, and we believe that the banks are well positioned going forward.
There are a couple specific catalysts that we see as opportunities.
The first is that the prospects of banks are a function of the underlying economies that they serve.
So, we are particularly excited about the Midwest banks because we believe that there's going to be a lot of investment in manufacturing, bringing jobs back onshore as well as building strength and redundancy in supply chains.
Additionally, the banks have also benefited from the fact that, at the worst point of 2023, the expectation was that there was going to be approximately a 20% hit to earnings longer term as a result of the increased capital requirement that were going to come as a result of the 2023 crisis.
[1] Capital expenditure
[2] Return on equity
Gabriel Solomon
Co-Portfolio Manager
Gabe Solomon is a co-portfolio manager of the US Large-Cap Value Equity Strategy. In addition, he is an Investment Advisory Committee member of the US Large-Cap Equity Income and Financial Services Equity Strategies. Gabe is a vice president of T. Rowe Price Group, Inc.
Portfolio Specialist Julian Cook discusses his outlook and expectations for U.S. growth companies.
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