Billionaire investor Larry Fink – CEO of the world’s largest asset manager BlackRock (BLK) – recently expressed extremely bullish sentiment on the stock market, telling Jim Cramer:

I’m more optimistic than ever.

He went on to emphasize that – due to this optimism – investors with risk appetite should allocate up to 100% of their portfolios to equities.

In this article, we look at the reasons for his optimism and then share our own approach along with some of our top picks of the moment.

Billionaire Larry Fink’s Market Outlook

Larry Fink, who oversees $9 trillion in assets under management clearly has a highly optimistic outlook on equities right now despite numerous prevailing economic concerns. Fink’s optimism is rooted in several factors:

• BLK – which oversees some of the world’s largest ETFs such as the iShares Core S&P 500 ETF (IVV), the iShares Core MSCI EAFE ETF (IEFA), the iShares Core U.S. Aggregate Bond ETF (AGG), the iShares Silver Trust ETF (SLV), and the iShares Gold Trust ETF (IAU) – by virtue of its size and global business presence has access to a tremendous amount of proprietary market and macroeconomic data. This data apparently leads Mr. Fink to believe that the current economic environment offers an attractive investment opportunity via public markets​​.
• Second, while Mr. Fink recognizes existing challenges such as geopolitical tensions and persistent inflation, he also sees long-term trends such as artificial intelligence and robotics that should prove to be highly deflationary over the long-term and ultimately paint a bright future for the global economy and the welfare of humanity.

Ultimately, he believes that hard assets like infrastructure – which should benefit from recently passed government legislation such as the Infrastructure Investment and Jobs Act and the growing reshoring trend – as well as robotics and AI stocks as providing highly promising long-term total return potential. As he stated in the interview with Jim Cramer:

I believe in 10 or 20 years humanity [will be] in a better position than it is today. With that view, I want to own hard assets today. I want to own equities. I want to be part of this economy…As the IRA is being implemented, [infrastructure is a] good healthy long-term investment…[there are infrastructure opportunities that have the potential to deliver] anywhere from 8% to 15% returns with high probabilities of success.

Our Approach

First and foremost, we certainly agree with Mr. Fink that there will undoubtedly be tremendous long-term growth and investment opportunity in the robotics and AI spaces and that this will have an enormous and transformational impact on the global economy and mankind’s way of life.

Moreover, we also agree that infrastructure presents a compelling investment opportunity in the current global economic landscape, especially considering macroeconomic tailwinds from the current supply chain reshoring trend, the huge deficit of infrastructure around the globe, and the likelihood of inflation and interest rates remaining in a lowish band over the long-term due to the rise of AI and robotics.

Given that AI and robotics is in the early innings of ushering in massive improvements in production efficiency that will undoubtedly have a deflationary impact on the economy, infrastructure investment will likely turn out to be particularly attractive due to its long-term contracted nature and stable returns, which are more valuable on discounted cash flow basis when interest rates are low. Moreover, low interest rates reduce the cost of financing these large-scale projects, enhancing their feasibility and potential profitability.

Furthermore, there is a pressing need for upgraded infrastructure in developed countries, where much of the existing infrastructure is aging and inadequate for modern demands, especially in light of the ongoing fourth industrial revolution. As a result, there will be massive demand for new and improved assets in this sector in the coming years and immense amounts of capital should continue to flow into the space through lucrative government contracts and public-private partnerships. Emerging economies are also in dire need of infrastructure development to support their growing populations and economies, making the infrastructure space a truly global investment opportunity.

Finally, the trend towards supply chain onshoring adds another dimension to the attractiveness of infrastructure as an investment opportunity. As companies move manufacturing closer to the consumer, there will also be an increase in demand for sophisticated logistics, transportation, and warehousing infrastructure.

That being said, we disagree with Mr. Fink on a few key points:

First and foremost, we disagree with him that equities in general are extremely attractive right now. On the contrary, we believe that the mega-cap tech stocks such as the “Magnificent Seven” – consisting of Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL)(GOOG), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA) – are significantly overvalued. As a result, the major indexes such as the S&P 500 (SPY) and Nasdaq (QQQ) that are dominated by these same mega-cap tech stocks are also quite overpriced based on numerous valuation models. For example, the Buffett Indicator suggests that the market is overvalued right now as the Buffett Indicator (which compares the total market value to GDP) ratio of 175% is approximately 44.17% or 1.4 standard deviations above the historical trend line. As a result, we do not think it is prudent to be blindly fully invested across the market right now, even for more aggressive investors. Instead, we think investors should selectively weight their portfolio towards more opportunistic sectors and individual stocks, while also taking advantage of some higher yielding fixed income investments.

Second, we think that investors should be cautious about pouring cash into the AI and robotics sectors given that they require significant technical know-how and a lot of speculation to pick the long-term winners. Instead of investing in areas outside of their circle of competence in competition with sector experts like Ark Invest (ARKK) and other talented analysts, we think that most investors would be better off sticking with simpler, easier to understand, and less speculative industries where compelling opportunities still abound.

That being said, one of our favorite investment opportunities today also happens to be one of Mr. Fink’s favorites: infrastructure. For example, we like energy midstream infrastructure (AMLP) – particularly Energy Transfer (ET) given its high yield, strong position in LNG exports, cheap valuation, and dramatically improved balance sheet – as well as alternative asset managers that focus on global infrastructure with an emphasis on the developed world such as Brookfield (BAM)(BN)(BIP)(BIPC)(BEP)(BEPC) and those that focus on emerging economies such as Patria Investments (PAX).

For the reasons stated previously in this article, we believe that high quality, strategically located infrastructure is going to become increasingly valuable in the years to come and that competitively positioned alternative asset managers with infrastructure expertise and the ability to raise significant sums of money – such as BAM, PAX, and Blackstone (BX) – will be able to achieve tremendous amounts of growth in the years to come as capital continues to pour into the sector. A recent example of this was BAM’s ability to raise $28 billion in investor commitments for its flagship global infrastructure equity fund, making it the largest global infrastructure fund ever raised by the company, 40% larger than its predecessor fund and exceeding BAM’s $25 billion target by over 10%. This fund is specifically targeting investment opportunities related to what BAM calls “the Three Ds” of digitalization, decarbonization, and deglobalization.

Investor Takeaway

While we share Larry Fink’s enthusiasm for long-term growth opportunities in AI, robotics, and infrastructure, we disagree with him in our assessment of the attractiveness of the current overall equity market. Despite Fink’s bullish stance – which is likely colored at least in part by the fact that BLK benefits from bull markets – valuation models like the Buffett Indicator alongside a slowing global economy and major geopolitical risks suggest an unattractive risk-reward profile in the market today, particularly in frothy mega-cap tech stocks which have been in an incredible bull market this year.

Therefore, we believe that a more selective investment strategy focusing on sectors that combine value with long-term growth potential – such as high quality and defensively positioned infrastructure – and higher yielding fixed income investments may be prudent. As a result, we think we can continue to generate attractive long-term total returns without exposing ourselves to too much near-term downside risk.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.