Investors should not be focusing on a Fed outcome, says MFS' Robert Almeida
This MFS fund manager is shunning tech hardware to invest in industrial names, some software and booze.
A Federal Reserve interest-rate decision is hovering over stock markets for Wednesday, but don't make the mistake of overthinking it, says MFS Investment Management's chief global investment strategist, Robert Almeida.
"What matters is what will the return on invested capital be for company X or the market in 6 months, 12 months, 18 months, and then what multiple are you paying for that?" Almeida, also portfolio manager for the MFS Diversified Income fund DIFIX, told MarketWatch in an interview on Tuesday.
"We've had a major paradigm change, a major regime shift in the capital cycle. The capital cycle was funding financial engineering, now the capital cycle is funding a new tectonic life-changing technology," he said.
How that change affects company returns matters more than rising interest rates, which are simply a sign of demand for capital as households spend money, banks lend and companies invest, he said.
Almeida expects that rising costs of labor, capital and competition will start to weigh on earnings. "Going into 2026, we thought profit margins were too high, unsustainably too high and would start to soften." He sees investor doubts starting to emerge amid market wobbles this year for technology and artificial-intelligence themes.
He said the fund has been underweight technology for some time given it has a mandate to generate income. That contrarian stance means the fund has struggled to keep pace with the S&P 500 SPX - up an annualized 3.8% versus the U.S. equity benchmark's 12.6% over five years.
In a recent strategy note, Almeida flagged a parallel between the AI build-out cycle and the 2008 global financial crisis. In 2006, home prices stopped rising at a rate that allowed overleveraged borrowers to refinance, which led to a domino effect and the crisis, he said.
"I think the parallel with today is we don't need Anthropic or OpenAI or other models to be unprofitable, but as the market starts questioning or discounting the return on investing capital for these large model providers, then that will start to have ramifications throughout the supply chain," he said.
He said the investment firm is strategically long compounders - companies that consistently grow earnings at an above-average rate. They are strategically underweight cyclicals, such as AI-beneficiary technology hardware companies that they think will eventually face the risk of an oversupplied market. Even if memory is seen in short supply, the market is now looking at possible oversupply in 2028 from China competition or slowing capital spending on AI because returns are falling short of hopes, he said.
Industrials are a chunk of the high-quality compounders Almeida prefers. Parts of their business are AI adjacent, vital "cogs" for building a data center or electric-vehicle factory. He prefers names such as Amphenol $(APH)$, Schneider Electric (FR:SU), TE Connectivity $(TEL)$, Honeywell $(HON)$, and Assa Abloy (SE:ASSA.B).
He said some are trading at 30 to 40 times earnings, which signals the market sees more secular growth characteristics, rather than just AI bulidout. "These companies are directly involved in building out a planet that has depleted its resources," and needs houses, factories, rockets and data centers in space, he said.
Almeida also likes a handful of software names, noting some parts of the sector "need very little growth to generate returns for shareholders," he said. Companies such as Salesforce (CRM), MongoDB $(MDB)$ and Pegasystems $(PEGA)$ provide overall infrastructure around AI, which can't be easily replaced if domain expertise is critical, he said.
He also likes companies in the life sciences tools space, such as Danaher $(DHR)$ and Thermo Fisher $(TMO)$, that will provide "mission critical instruments" for AI drug discoveries. "Those have been really dumped out stocks for the past five years. That's an area where we've been overweight for 20-something years," he said.
Finally, he likes consumer staples and drinks companies such as Diageo (UK:DGE) and Pernod Ricard (FR:RI). Almeida said there is a "false narrative that younger people are going to stop drinking altogether," he said. Apart from being "super cheap," those companies just need "GDP-like growth to generate above-average stock returns."
The markets
U.S. stock futures (ES00) (YM00) (NQ00) are broadly trading higher.
Key asset performance Last 5d 1m YTD 1y S&P 500 7428.78 -1.07% -0.94% 8.52% 16.61% Nasdaq Composite 24,876.91 -3.72% -5.10% 7.03% 17.91% 10-year Treasury 4.627 -4.10 14.20 45.50 24.80 Gold 4033.5 -2.45% -0.27% -6.89% 21.20% Oil 82.24 -4.90% 20.78% 43.25% 16.98% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
The Fed will announce a policy decision at 2 p.m. A news conference with Fed Chairman Kevin Warsh follows at 2:30 p.m.
The U.S. intercepted surprise ballistic missile attacks on troops in Jordan late Tuesday, which is driving up oil prices (CL.1) (BRN00). Separately, the U.S. and Saudi Arabia jointly struck Iran-backed militia sites in Iraq.
Meta $(META)$, Microsoft $(MSFT)$ and Qualcomm $(QCOM)$ will report after the close.
SK Hynix (KR:000660) $(SKHY)$ is tumbling on earnings that failed to meet high expectations.
Ford $(F)$ is jumping after forecast-beating results and an outlook boost.
Seagate stock $(STX)$ is also climbing after earnings topped expectations, lifting shares of other storage makers such as Western Digital $(WDC)$ and Micron Technology $(MU)$.
Alabama animal shelter sues to stop massive data center risking health of thousands of pets
The chart
This JPMorgan chart shows healthcare's weight in the S&P 500 has slid to 9% from a 16% peak in 2022, as strategists reiterated a preference for the underowned sector. "Healthcare offers a rare combination of durable growth, technology-like profitability, attractive valuation and diversification benefits when many investors remain heavily concentrated in the AI theme," a team led by Dubravko Lakos-Bujas told clients in a recent note. They see several positives ahead: a material acceleration in earnings in 2027; potential gridlock for midterm elections easing investor worries about healthcare and drug-policy uncertainty; and possible upside surprises from AI productivity improvements. They prefer biopharma and med tech/life science-tools stocks.
Top tickers
These were the top-searched tickers as of 6 a.m.:
Ticker Security name MU Micron NVDA Nvidia TSLA Tesla SPCX SpaceX TSM Taiwan Semiconductor Manufacturing SNDK Sandisk AMZN Amazon AMD Advanced Micro Devices AAPL Apple INFY Infosys
Herd of bison holds back a massive fire in Madrid.
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