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New Buying Opportunity Emerging in ‘Mega-Caps,’ Says Belski

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The stock market is catching its breath after a long, vigorous run. And after it rests a while, expect the biggest, brawniest companies to lead the next phase of the bull market.

That’s the latest market take from Brian Belski, chief investment strategist at BMO Capital Markets, who correctly predicted that stocks would settle back from their all-time highs in early August but now sees U.S. “mega-cap” stocks as investors’ best bet.

“Stocks are a little ahead of themselves based on where earnings are,” Belski says in the attached video. “Stocks lead earnings which lead the economy.” The Standard & Poor’s 500 index (^GSPC) has climbed 1,000 points from its March 2009 bear-market low of 676 and “can’t continue on that pace, we need to take little bit of a breather.”

At its August 2nd record high of 1709, the S&P 500 was up 17% so far in 2013, and 26% from its mid-November low, far outperforming modest corporate profit growth and most other world markets. Since then the market has receded more than 3%, as investors’ focus turned toward expected curtailment by the Federal Reserve of its $85 billion bond-buying program, probable D.C. budget battles, and heavy financial stresses spreading through the emerging markets.

Related: Stagflation Is Here as Fed Succeeds at Inflationary Target: Rosenberg

Belski - whose formal year-end target of 1650 for the S&P 500 is just about where the index sits now – isn’t looking for dramatic declines in stocks from here, however. “We still think U.S. equities are the best-positioned fundamental asset class in the world.”

While the beaten-down global stocks in China and Europe have lately bounced as the world tries to handicap an economic upturn there, Belski says it’s “too early” to leave U.S. stocks in favor of this global recovery trade.

In particular, he likes familiar, mega-cap American multinationals at this point in the cycle. Small-cap stocks, as represented by the Russell 2000 (^RUT), led the way higher for most of the nine-month rally, and indeed have outperformed big stocks for years now.

Belski believes smaller stocks have had their day. They led the 1999-2008 market run, and the same market segment rarely repeats as the ultimate leadership group in the next market phase, he says. And the “consensus belief” that small-caps were the way to play the domestic economic recovery has made them appear richly valued.

“Large and, in particular, mega-cap stocks are much better-positioned. The entire secular bull market we believe is underway is all about cash – it’s about deploying cash,” he says.

Mega-caps - generally defined as companies greater than $50 billion in market value – have been mobilizing their hefty cash stores in recent years to buy back piles of stock and increase dividends. The “next phase” will have them using their plentiful cash to increase capital spending and boost merger-and-acquisition activity.

Related: Time to Be Bullish on Share Buybacks, Says Belski

These blue chip companies are much better valued than small-caps, have stronger balance sheets and more consistent and stable earnings.

Of course, huge companies are not immune to the challenges of a slow-growth economy. Stalwarts such as Cisco Systems Inc. (CSCO) and Wal-Mart Stores Inc. (WMT) just this month reported disappointing quarters and had their shares punished harshly for it.

Yet Belski points out such stocks had a strong run of late heading into earnings season, and investors can take comfort in looking beyond quarter-to-quarter noise when considering owning dominant mega-cap names whose businesses tend to be resilient over a multi-year period.

“That is going to be a big part of alluring Mom and Pop back in to buy these big, brand-name companies,” such as Apple Inc. (AAPL), Coca-Cola Co. (KO), Johnson & Johnson (JNJ) and Target Corp. (TGT), as the public – which has largely sat out this bull market - rediscovers stock investing, he suggests.

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