By Randall W. Forsyth

Most of what people expect in the future is based on what they've known and experienced in the past. For investors, that has generally meant rising prices and strong total returns for the past four or so decades, with nasty interruptions along the way -- most recently, the steep drop in stocks during the 2020 Covid crisis, the 2008-09 financial crisis, and the bursting of the dot-com bubble in 2000-01.

In every case, however, stocks eventually rallied back, fueled in large part by aggressive Federal Reserve easing.

Whether this past will serve as prologue is unknown because of the two most-used words spoken in recent earnings conference calls: "tariffs" and "uncertainty." What should be certain after the barrage of policy shifts from the administration of Donald Trump is that the future is unlikely to be like the experience of most investors.

With tariffs (which are subject to change -- an understatement, to be sure) having raised the odds of both higher inflation and recession, the Fed may be constrained by the former to address the risk of the latter. John Silvia, Well Fargo's former chief economist, writes in his Dynamic Economic Strategy note that investors should assume inflation will run at 3% instead of returning to the Fed's 2% target for the core personal consumption expenditures price index.

Jim Bianco, the eponym of Bianco Research, suggested that means the Fed may cut its federal-funds rate target only once this year, by one-quarter of a percentage point from the current range of 4.25% to 4.50%. That, in turn, suggests an investment outlook that he described as "4-5-6" in a recent video with DoubleLine founder Jeffrey Gundlach. By that, Bianco means cash equivalents should return about 4% over the next several years, while bonds should provide around 5%, roughly the yield on the Bloomberg U.S. Aggregate Bond Index. But he said stocks won't enjoy the strong tailwinds that propelled the S&P 500 index to 20%-plus annual returns in the past two years. Returns of 6%, he observed, are hardly disastrous, but they're nothing like the salad days of recent years during which simply betting on the technology-driven S&P 500 bested anything else.

Yet after a 7.81% decline in the S&P 500 in the three months through April 30 (and a 7.13% drop since Inauguration Day on Jan. 20), the price/earnings multiple on the index nonetheless remains in the top quartile historically, according to Rosenberg Research, as nine of the 11 S&P sectors have seen cuts in their earnings estimates. And as the earnings forecasts have come down, year-end S&P estimates of strategists tracked by Bloomberg have been cut to 5823, about a 3.5% gain from Thursday's level.

To generate more than Bianco's anticipated 6% equity returns will require taking more risk, he explained in an email. And it could mean the return of active portfolio management after years of index funds posting superior returns.

Charles Lieberman, chief investment officer at Advisors Capital, thinks 6% is too pessimistic. That might be what the S&P 500 generates owing to its heavy weighting of the still richly priced Magnificent Seven tech giants. But away from the top 10, he points out there are 490 other stocks, many of which he declares are "flat-out cheap."

"You have to ignore a lot of noise and look where the values are," he said in an interview this past week. Among them are the big financials, notably Wells Fargo, which this past week authorized a new stock-repurchase program of up to $40 billion. Another pick in the sector is Lincoln National, a life insurer with a generous 5.58% dividend yield.

Income is a major focus of Lieberman's portfolios, which leads to mainstays such as real estate investment trusts, business development companies, and utilities. Among REITs, he likes Starwood Property Trust, which he sees benefiting from the beginning of turnarounds in office properties on both coasts. Nursing home REITs have demographics behind them with an aging population. His picks in the sector include LTC Properties, Sabra Healthcare, Omega Healthcare Investors, and Welltower, which have experienced rising occupancy rates nearly every quarter.

Among BDCs, he likes Sixth Street Specialty Lending and Hercules Capital, which offer double-digit yields. Their loan portfolios are the first cousins of private credit, which once was the province of institutional investors but now is being pitched these days to retail investors. Utility picks include stalwarts such as Southern Co. and Exelon, along with lesser-known names such as Brookfield Renewable Partners.

Finally, Lieberman likes Boeing convertible preferred shares, which provide a play on the aircraft maker while fulfilling his portfolio's income requirement. Which shows that there's more to investing than common stocks, which may not always go up as in the past.

Write to Randall W. Forsyth at randall.forsyth@barrons.com

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May 02, 2025 02:00 ET (06:00 GMT)

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