As a co–chief investment officer of Bridgewater Associates, the world’s biggest hedge-fund firm, Karen Karniol-Tambour scours global markets for good investment opportunities. She’s increasingly finding them outside the U.S.
“I’m definitely a little bit bearish on U.S. stocks, and I especially don’t like their valuation relative to other opportunities around the world,” Karniol-Tambour said in an interview with MarketWatch. “U.S. stocks are pricing in perfection because what’s happened is the U.S. has just outperformed the world for so long.”
At age 38, Karniol-Tambour has watched U.S. stocks outperform for much of her professional career, as she climbed the ranks at Bridgewater before being named co–investment chief earlier this year. With the retirement of Ray Dalio and the leadership change at Bridgewater, Karniol-Tambour is set to play an outsized role at the firm for years to come and lands on the MarketWatch 50 list of the most influential people in markets.
When U.S. stocks started to outperform stocks in other countries years ago, Karniol-Tambour recalls, U.S. stock valuations were relatively low and positive earnings surprises would boost them. But these days, she says, valuations for U.S. stocks reflect pretty reasonable expectations for earnings.
“In other words, I don’t think companies are going to struggle that much because I don’t expect growth to be a total disaster. They’re not amazing. I think prospects are OK. The problem is, it’s already in the price. Valuation already reflects that,” Karniol-Tambour said. “So it’s just much easier to get a downside surprise, whereas in other parts of the world there’s much weaker earnings expected. It’s just not already valued. It’s not already in the price. It’s much easier to outperform.”
Specifically, Karniol-Tambour referenced the exposure in so many portfolios to big tech companies, such as Apple
AAPL,
Microsoft
MSFT,
and Alphabet
GOOGL,
GOOG,
that have driven so much of the gains of the S&P 500
SPX.
At some point, investors will view a portfolio rebalancing as prudent, she added, making U.S. stocks more vulnerable.
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So where else in the world can investors go? Karniol-Tambour thinks they should take a close look at Japan. These days, when Karniol-Tambour talks about the opportunities in Japan, she often feels people look at her like she’s stuck in the 1980s. But Karniol-Tambour says that because investors ignored Japan for so long — not buying Japanese stocks or bonds — the result was that Japanese companies just didn’t even think about returning money to shareholders. But that is starting to change.
“You have some of the best valuations because of that history of that success not already being priced in,” Karniol-Tambour said.
Back home in the U.S., Karniol-Tambour says the economy remains pretty strong, as several forces offset the Federal Reserve’s tightening efforts. Her projection is that the economy will gradually weaken but that inflation will remain a little too sticky and limit the U.S. central bank’s ability to come to the rescue.
“As the economy stays strong and just kind of gradually grinds down, you don’t get enough decline in inflation to really make the Federal Reserve comfortable with really strongly easing into those conditions,” says Karniol-Tambour. “So could they ease a little bit? Sure. Could they ease a lot? I think that’s challenging to see without a very significant economic slowdown.”
Will there be a recession in the U.S. next year? Karniol-Tambour says the odds are reasonable and the Fed will have a tough time responding the way it has in recent years. “Eventually, the fact that you can’t ease just changes the game from the one we’ve gotten familiar with where any slowdown gets immediately reversed.”
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