By Abby Schultz
Alex Chaloff, the chief investment officer and head of investment and wealth strategies at Bernstein Private Wealth Management, says he likes to push his clients to take more risk than they might prefer.
Geopolitical and economic uncertainties have many investors on edge, and price/earnings ratios for U.S. market leaders are at historic highs. But Chaloff, who has been with Bernstein for two decades, isn't changing his bullish tune.
Corporate earnings remain strong, for one. Some analysts say that annualized corporate growth within the S&P 500 index could surpass 23% this year, according to FactSet. "If we get earnings growth rates for the S&P in the mid- to high teens or low 20s this year, the rest will take care of itself," Chaloff says.
At Bernstein, AllianceBernstein's private wealth and investment management unit, Chaloff oversees $156 billion. The majority of those assets under management come from investors, family offices, and business owners with more than $10 million.
Optimism colors Chaloff's view of many corners of the markets, even some of those that have taken a beating this year, such as private credit and software stocks. He stays rooted in recession-proof, capital-heavy sectors like defense, healthcare, industrials, and agriculture. He also likes international stocks and small-caps, which he says trade at a growing discount compared with U.S. large-caps and offer diversification.
Chaloff recently spoke to Barron's about the sectors he is most excited about right now and how he thinks about risks with artificial intelligence and private credit. An edited version of the discussion follows.
Barron's : You have a pro-risk bias at a time of heightened geopolitical risks and rising inflation. Why?
Alex Chaloff: It starts and ends with earnings. We came into the year skeptical but with a 10.5% to 11% earnings growth forecast for the S&P 500. Those numbers are ancient history, blown away by what has been an unbelievable earnings season.
U.S.-based, large-cap stocks are having a good run. Why are you also investing in international and small-caps?
International stocks have looked more attractively valued than U.S. stocks over the past 20 years, but the gap has widened significantly since the rise of the Magnificent Seven. For much of the past three years, U.S. equities have traded at roughly two times the forward price/earnings ratio of European, Asia, and Far East stocks, and around two and half times that of emerging markets. For investors looking to reduce exposure to premium valuations, lessen concentration in the AI trade, and add diversification, international equities offer a compelling option.
Small-caps have other key advantages: attractive valuations and greater dispersion within the index. Their valuations have been roughly half that of the large-caps, mostly because a disproportionate amount of capital has been flowing into large-cap tech and AI names. That created an attractive entry point into small-caps last fall, which has since paid off. Small-cap indexes also lack the concentration risk that has weighed on U.S. large-caps, offering investors broader diversification and a more balanced opportunity set. It's a win-win.
For investors who want tech exposure without paying top-tier valuations, Taiwanese companies, including their small-cap tech firms, stand out. Taiwan Semiconductor Manufacturing is the most obvious, but many others are well positioned to become global leaders in the coming years.
What other sectors do you like?
Defense, industrials, capital equipment, healthcare -- not necessarily drug development but more senior and individual care -- are interesting. They are recession-proof and inflation beneficiaries.
Tell me more about defense.
The world has to rebuild its military infrastructure after the Ukraine and Iran wars. The big guys will win this cycle. RTX is front and center, as are BAE Systems and Airbus. All three have solid fundamentals and align with the U.S. government's priorities, particularly in missile capabilities, which need to be replenished. And while Airbus' current market valuation, close to $170 billion, is at or above average, its growth potential and quality explain any premium.
New NATO targets agreed to in 2025 call for member countries to spend 3.5% of gross domestic product on defense, setting up a roughly 8% to 9% annual increase in European military spending for at least a decade. Asian countries are also ramping up military spending, which should further support European defense companies.
Bernstein is involved in infrastructure, too. What are you seeing there?
Infrastructure is where agriculture, capital equipment, and industrial come together. The U.S. has decrepit infrastructure. There are projects that were approved five or six years ago that are finally becoming shovel-ready. There was some uncertainty in the stock prices of a lot of heavy-equipment companies that didn't benefit when projects were approved, but now you're starting to see a little bit of a tailwind there that is a multiyear trade. A company likely to benefit is GE Vernova, which is well-known for addressing AI power bottlenecks. We have been trimming our position on recent strength. Carrier Global, Eaton, American Electric Power, and CSX will likely benefit, as well.
You mentioned agriculture, which is a sector facing inflationary pressures related to the Iran war. What opportunities do you still see there?
Rising fertilizer prices may make farmers more cautious about buying new equipment, but they are less likely to cut back on seeds or yield-related investments. Higher oil prices and tighter regulations on truck drivers add further uncertainty.
In this environment, equipment renting becomes more attractive than buying, which supports companies like United Rentals. Infrastructure and onshoring projects require construction equipment, and United Rentals is the largest equipment rental business in the market. Its scale matters. Getting the right equipment to the right place at the right time and keeping fleets operational is its major competitive advantage. And strong demand for United Rentals' equipment could also drive more rail activity, which brings the story back to CSX.
Also, the land that we have has to be more productive. You know the old joke: They aren't making any more land, but they are making more mouths. The companies that are focused on yield improvement instead of just volume are interesting names.
We believe Corteva is best positioned here. It has a strong product suite in seeds and crop protection and is well positioned to gain market share. Deere is a close second. We continue to consider its valuation, at roughly $595 a share, attractive.
Most of these are value stocks. Why are you drawn to them?
The value space is interesting today. A lot of what we own are companies that have the pricing power to turn the dial. I'm happy to own boring names with great cash flow that can turn up pricing and where I don't have to worry about a technology they are developing suddenly turning out to be worthless.
Speaking of developing technologies, do you have any AI-related concerns?
The AI models are really, really good right now, but they need more processing power. The supply side is under pressure because there is a shortage of processing power. The stock prices of the companies that are trying to bridge that gap are rallying. We are focused on Seagate Technology Holdings and Micron Technology, which have seen over 200% growth this year on the back of significant pickup in spend on memory.
On the monetization side, AI companies are trying to figure out how they get big corporate buyers. How can they become the default model? Even Microsoft is trying like crazy with Copilot to figure out a way to be the blue chip of AI models and capture what we used to think of as enterprise rates from a revenue perspective. So, it's a battle, and companies like ours and others that consume AI models have the leverage. But once this battle settles out with someone being pre-eminent, that will flip.
To the extent these companies have near-term weakness, I don't think that is necessarily a bad thing. Those that will be successful can turn the dial on pricing.
Bernstein maintains an optimistic view of medical technology stocks, despite their lag since the Covid-19 pandemic. Do you personally see them as opportunities?
People got excited around 3-D printing of organs a few years back. AI is going to completely turbocharge that type of development for anything across the research-and-development spectrum. Using Claude, Anthropic's AI assistant, you can take three months of work and cut it down to 25 minutes. How many more tests can you run? How many more people can you have in your sample size? All of those questions roll through to medtechs.
Biotechs are an interesting play from an acquisition-premium standpoint. Eli Lilly, Merck -- you name it -- will come after them and pay a rich premium. We can build a portfolio of biotechs in the small-cap world and just wait for them to be bought out.
What is your outlook on private credit, which has recently seen waves of redemptions?
Three years ago, the world was rosy, the market was favorable, the economic backdrop was favorable, and everything was fine. If you wrote a bad loan, nobody knew it was bad, including you. It isn't until you run into stress in an economy or a business model that you discover that you weren't doing it right.
There have been about 14 high-profile defaults. If you take the character of those 14 and look at what else was underwritten over the last five years, there are probably another 40 or 50 big, bad loans that will go south over the next 12 to 18 months. The headlines are real. There is actual evidence of poor underwriting. I don't think this is a case of media hype, and I think it gets worse.
But you still like private credit for your investors?
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June 18, 2026 01:00 ET (05:00 GMT)
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