10 to 15% of portfolio should be in SMID caps: BMO's Belski

US equities (^GSPC, ^DJI, ^IXIC) waver in pre-market hours as the market patiently awaits Big Tech earnings reports out from Alphabet (GOOG, GOOGL) and Tesla (TSLA) later today. A significant growth driver in the first half of 2024, tech results may signal to investors how the tech trade may play out in the latter half of the year.

BMO Capital Market chief investment strategist Brian Belski joins Morning Brief to give insight into the tech sector and what investors need to keep in mind for their portfolios.

In terms of the broadening out tech trade, Belski states: "I think people are overplaying that a little bit. I know obviously we had very strong concentration in the month of June and then July. We've seen the semblance of what we've been calling for now for several months in terms of the broadening out effect... I talked about the theme of 'everybody love everybody,' meaning own a little bit of everything. And it's starting to really work in terms of investment strategy and portfolio construction."

Belski explains "there's still a lot of clients that are sitting in cash" when addressing whether investors should play in both big (^DJI, ^IXIC, ^GSPC) and small-cap stock names (^RUT):

"If you look at the small mid-cap universe, quite frankly, in the publicly traded marketplace in the United States, it apprises 7%, and so we're saying like 10 to 15% of your portfolio should be in small mid-cap."

He underlines that small and mid-cap universe "has been largely abandoned" and can be beneficial for investors "massively overweight" in mega-cap names.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Nicholas Jacobino

Video Transcript

We are less than 30 minutes until the opening bell on Wall Street.

Take a look at the major averages.

Here we are seeing this move lower really across the board.

Now this comes as investors digest a slew of of uh earnings reports before the bell this morning.

Those results including the latest prints here from GM and UPS.

Now the attention though turning to mega cap tech and that's really on the top of mind here for traders mag seven members, Tesla and alphabet both set to release their results after the bell today.

Now tech is expected to be a big driver of earnings growth.

Once again this quarter, four of the companies in the mag seven are projected here to be among the top five contributors to annual earnings growth in the second quarter.

This is the latest figures here from the facts that when you take a look at meta, they're expected to contribute the most.

You've also got alphabet, Amazon and NVIDIA on this list, the outlier amongst this group is and me but one difference.

So this quarter is going to be signs of broadening.

Now, outside the mag seven and even outside those top four companies that we just mentioned, Amazon Google Meta and NVIDIA earnings growth for the remaining 496 companies within the S and P 500 is expected to be back in positive territory.

So here to discuss that and much more, we want to bring in Brian Belski.

He's BMO Capital Markets, Chief Investment strategist, Brian.

It's great to talk to you.

Let's start with some of that rotation really that we have seen.

We're starting to see signs of rotation within the market.

But still when you take a look at the earnings projection and really the driver here of the gains that we've seen since the beginning of the year.

A lot of that still obviously talked about when it comes to Big Tech.

I'm curious how your, your assessment here of the risk associated with that concentration, how investors should be thinking about this, Brian?

Well, good morning Sha uh Shannon and Good morning Yahoo.

Um You know, we've written a lot about the concentration side of things and I think people are overlaying that a little bit.

Uh I know obviously we had a very strong concentration in the month of June and then July, uh we've seen the semblance of what we've been calling for now for several months in terms of the broadening on effect.

And if you remember when I was on your network and the beginning of the year, I talked about the theme of everybody love everybody, meaning on a little bit of everything and, and it's starting to really work in terms of investment strategy and portfolio construction.

Uh but there has been too much dominance with respect to these big cap tech stocks.

We instead of calling it the magnificent seven, we call it the super seven in terms of the seven distinct businesses and technology.

Uh be that as it may, we think uh many of those names, quite frankly, shaw it should be your core holdings kind of like consumer staples.

You probably remember me saying that on your network, I think these are the new consumer staples names and then the second tier of tech, which would be names like Oracle and Broadcom um and Qualcomm and A MD, those types of names I think are gonna garner more support as we go on.

This is not about second quarter earnings, quite frankly, it's about the guidance for the next six months, but also into 2025.

And that's why I think uh a Barbell with respect to sectors of of owning both tech and financials still make a lot of sense.

And as you broaden that out more, continue to add more to the small cap universe where we've been overweight to add more to the small cap universe.

Should investors be trimming some of their holdings in those large cap mega tech names?

Great question, Maddie.

Nice to hear your voice and see your face.

Uh You know, you're assuming that everyone's 100% invested, Maddie and they're not.

And I think there's still a lot of uh clients that are sitting in cash.

If you look at the small mid cap universe, quite frankly, in the publicly traded marketplace in the United States, uh it uh prices seven percent, 7%.

And so we're saying like 10 to 15% of your portfolio should be in small mid cap.

In fact, we have a very good fortune of running portfolios for BMO wealth in both Canada and the United States.

And our best absolute uh I'm sorry, our best relative performance above the benchmark is our small midcap money because we're stock pickers and we play themes.

And so I think that the small cap in midcap universe has been largely abandoned.

I do think if you are massively overweight, let's call it massively overweight, these big core names.

Um I think you may want to turn back to more of a market weight.

I think it's really difficult to be overweight, apple or overweight.

Nvidia on these types of um markets especially given how much they've rallied.

So I think that there's cash to be put to work and that cash to be put to work.

Maddie should be more in the fundamental value parts of the market and small midcap overall.