Last month, veteran investment chief Keith Lerner advocated for buying stock-market dips. Now, just six weeks later, Truist's chief market strategist has shifted his stance, downgrading U.S. equities for the first time in years and recommending that investors hold more cash.
"The risk-reward balance has changed," Lerner said in a recent interview. "It’s not catastrophic, but the market is in a more mixed position than before."
Lerner’s decision to move U.S. stocks from "attractive" to "neutral" comes amid an optimism-fueled rally that has lost steam. The S&P 500, which reached record highs in mid-February, has since retreated as markets contend with weaker economic data, policy uncertainty, and lofty valuations. Recent cautious guidance from Walmart further dented sentiment.
Despite these concerns, economic fundamentals remain solid, and Lerner does not foresee a recession. Instead, he points to overly optimistic investor expectations as the main issue.
"The problem isn’t that things are unraveling," he said. "It’s that expectations were too high, and now we’re seeing signs of softness."
Cracks in Lofty Earnings Estimates
The stock market may be a victim of its own success. Earnings growth has repeatedly outpaced cautious analyst forecasts, leading investors to expect consistent outperformance. This year, the market is pricing in low double-digit profit growth, though Lerner’s estimate of 8%-10% is slightly more conservative.
Rising corporate profits, combined with a stable economy, typically support higher stock values. Excitement around potential policy shifts, such as corporate tax cuts and deregulation, has fueled further enthusiasm. However, Lerner warns that continued market strength depends on companies meeting these high earnings expectations—an increasingly uncertain prospect.
Forward earnings estimates, which had buoyed optimism, have stalled in recent weeks. While analysts often set conservative targets, the lack of upward revisions is notable, suggesting a dip in confidence.
Given that the S&P 500 trades at 22 times forward earnings, there is little margin for error. Any earnings disappointment could trigger a sharp pullback.
"When expectations are high, a negative surprise makes the market more vulnerable in the short term," Lerner cautioned.
Policy Uncertainty Weighs on Stocks
In addition to stagnant earnings estimates, Lerner highlights policy uncertainty as a key risk for equities. Interest rates and tariffs remain major concerns for corporate America.
The administration’s unpredictable stance on trade policy has left markets on edge. It remains unclear whether tariff threats are negotiating tactics or firm policy shifts, making it difficult for companies and investors to plan accordingly.
Meanwhile, the president is advocating for rate cuts, but Lerner believes the Federal Reserve is unlikely to oblige without more clarity on tariffs’ impact on inflation and economic growth.
"The Fed is in a holding pattern," he said. "They need to see how trade policy unfolds before adjusting rates. They won’t cut unless economic conditions deteriorate."
Consumers are also beginning to react to this uncertainty. Long-term inflation expectations recently hit their highest level since 1995, according to University of Michigan consumer sentiment data cited by Goldman Sachs.
"Prolonged tariff concerns increase the risk of a sustained rise in inflation expectations," said Joseph Briggs, co-lead of Goldman Sachs’ global economics team.
While survey data can be influenced by political polarization, Lerner acknowledges that inflation is a growing concern.
"Consumers are reaching their limit on what they’re willing to pay," he noted, suggesting that record profit margins could come under pressure.
Investment Strategies in a Shifting Market
Despite a less attractive outlook for U.S. stocks, Lerner still sees opportunities. His preferred investments remain domestic large-cap stocks, particularly in the technology, communication services, and financial sectors. Truist also maintains a favorable stance on mid-cap stocks.
However, he advises caution on small-cap stocks due to weaker earnings quality and higher sensitivity to interest rates. International equities, despite strong performance this year, also remain under his radar due to geopolitical and economic uncertainties.
As market conditions evolve, investors should reassess portfolio allocations, ensuring they maintain a balance between risk and liquidity. While equities remain a core investment, a more defensive stance may be warranted in the near term.
