Skip to Main Content

Belski: Believing in U.S. Equities, Big and Small

Building on the optimism of U.S. markets, Brian Belski introduces the new BMO U.S. All Cap Equity Fund, launched by BMO Investments Inc.

June 2021

Photo of Brian Belski

Brian Belski

Chief Investment Strategist

Read bio

Key Takeaways

  • New fund invests in U.S. large, mid and small cap stocks
  • U.S. companies will continue to lead global growth
  • Strong earnings to overcome inflation fears in near term

BMO Global Asset Management has a new fund launching in June – the BMO U.S. All Cap Equity Fund. How does this mandate differ from the BMO U.S. Equity Plus Fund?

BB: The new BMO U.S. All Cap Equity Fund is an opportunity for us, strategists at BMO Capital Markets, to employ our theme of investing in U.S. stocks across the majority of market cap perspectives – including large, mid and small cap stocks. We believe this strategy is supported over the next three to five years, and especially over the next 12 to 18 months. There are no Canadian names in the fund, and we’re benchmarking to the S&P 1500 Index, which is a combination of the S&P 600 Small Cap Index, the S&P 400 Mid Cap and the S&P 500. Because the latter is very similar to the large cap perspective, we can alter sector weights or use the small cap exposure to increase our beta, and that’s really the aim of this new mandate.

How will the U.S. fare coming out of the pandemic?

BB: We continue to believe that the United States will set the pace for the next three to five years. I would also say this: we believe U.S. companies are exquisitely positioned for the medium term. They’re the best managed companies in the world with respect to cash flow and balance sheet strength, and we’ve seen earnings results far exceed expectations this year. The first quarter was a historic period for positive revisions; more than 87% of the S&P 500 surpassed consensus EPS forecasts. As a result, we’ve raised our S&P EPS target for the full year by 8.5% to US$190 from US$175 – which may still be too low. Bottom line: we're starting to transition into an earnings-driven market, which broadens the rally and benefits an all-cap strategy where you can diversify across market cap spectrums.

We’re seeing tremendous optimism around earnings results this year. There have been lots of positive surprises, but investors also have concerns about inflation overheating. How do you reconcile these competing forces in the market?

BB: Well, this notion of inflation fear has really been around for 40 years. Investors have been waiting for it ever since President Reagan, Fed Chairman Paul Volcker and Speaker of the House Leader Tip O'Neill squashed inflation in 1982. Besides, too many people have forgotten what the Fed did in August 2020, when they changed their mandate away from inflation and toward employment. The idea of getting to sub 4% employment in the United States could take several more years to come to fruition, especially given the increased efficiencies in technology and the threat of a national minimum wage. All these factors could obviously put pressure on unemployment.

With respect to earnings, companies have been able to pass along some of the transitory costs that have increased on the input side. Add to this, analysts have been trained to be defensive and, as a result, their numbers are too low. We saw +50% year-over-year growth in the first quarter, so we’re optimistic that second and third quarter earnings will be very strong.

You wrote in late April that investors were feeling anxious about the Biden Administration’s plan to raise corporate tax rates. Can you tell us what specifically you’re hearing in client conversations, and why those fears may be overblown?

BB: On the corporate tax side, yes, fears may be overblown. We’re looking at an imminent move to either 28 or 25%, which would imply an earnings hit of 6 or 3%, respectively. From a longer-term perspective, this is de minimis, which is to say minimal. As I mentioned earlier, we’re dealing with an earnings base that continues to be robust. The bigger question is: what’s happening on capital gains? Investors tend to focus on corporate taxes because there’s little data on how the market has reacted historically. But worrying about taxes is like worrying about inflation, or the second coming of the Great Depression.

The best example is the political environment. Last year we were inundated with questions from investors about the implications of a Democrat in the White House and a blue wave in Congress. We told them the impact should be minimal in the near term. And revenues and profits continue to be strong. Perhaps there’s a cap on market moves at 25 to 30% – but that’s okay. We believe that an environment that offers 10-20% upside in the stock market is still a relatively strong backdrop for equities.

Brian, we like to end by asking for a book recommendation for our Advisor audience. Last time you gave The Art of Contrary Thinking. What do you have for us now?

BB: I would suggest Founding Brothers by Joseph Ellis. It talks about America’s beginnings, the relationships between those flawed, brilliant men and how they were able to work together despite their differences. People know some of this backstory from the musical Hamilton, but the details are what I find fascinating. Why did Burr and Hamilton have to duel in New Jersey, and not New York? Historical reading is deeply ingrained in my investing philosophy, because whatever happened before often portends what could happen in the future. As the old maxim says – all that’s old will be new again.

Read Brian’s latest Market Outlook, or access his U.S. and Canada Strategy Snapshots, by contacting your Regional BMO Global Asset Management Representative.

BMO Capital Markets Disclosures:

“BMO Capital Markets” is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Harris Bank N.A. (member FDIC), Bank of Montreal Europe p.l.c, and Bank of Montreal (China) Co. Ltd, the institutional broker dealer business of BMO Capital Markets Corp. (Member FINRA and SIPC) and the agency broker dealer business of Clearpool Execution Services, LLC (Member FINRA and SIPC) in the U.S., and the institutional broker dealer businesses of BMO Nesbitt Burns Inc. (Member Investment Industry Regulatory Organization of Canada and Member Canadian Investor Protection Fund) in Canada and Asia, Bank of Montreal Europe p.l.c.(authorised and regulated by the Central Bank of Ireland) in Europe and BMO Capital Markets Limited (authorised and regulated by the Financial Conduct Authority) in the UK and Australia. Bank of Montreal or its subsidiaries (“BMO Financial Group”) has lending arrangements with, or provide other remunerated services to, many issuers covered by BMO Capital Markets. The opinions, estimates and projections contained in this report are those of BMO Capital Markets as of the date of this report and are subject to change without notice. BMO Capital Markets endeavours to ensure that the contents have been compiled or derived from sources that we believe are reliable and contain information and opinions that are accurate and complete. However, BMO Capital Markets makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to BMO Capital Markets or its affiliates that is not reflected in this report. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor. Nothing herein constitutes any investment, legal, tax or other advice nor is it to be relied on in any investment or decision. If you are in doubt about any of the contents of this document, the reader should obtain independent professional advice. This material is for information purposes only and is not an offer to sell or the solicitation of an offer to buy any security. BMO Capital Markets or its affiliates will buy from or sell to customers the securities of issuers mentioned in this report on a principal basis. BMO Capital Markets or its affiliates, officers, directors or employees have a long or short position in many of the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. The reader should assume that BMO Capital Markets or its affiliates may have a conflict of interest and should not rely solely on this report in evaluating whether or not to buy or sell securities of issuers discussed herein.

BMO Global Asset Management Disclosures:

BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp., BMO Asset Management Limited and BMO’s specialized investment management firms.

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.

For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.

®/™Registered trade-marks/trade-mark of Bank of Montreal, used under licence.

* As compared to an investment that generates an equivalent amount of interest income.

®/™Registered trade-marks/trade-mark of Bank of Montreal, used under licence.

BMO Global Asset Management is the brand name for various affiliated entities of BMO Financial Group that provide investment management, and trust and custody services. BMO Global Asset Management comprises BMO Asset Management Inc. and BMO Investments Inc. Certain of the products and services offered under the brand name, BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO).

BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and separate legal entity from Bank of Montreal. Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the prospectus before investing.

Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.

BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.

Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments. Please read the ETF facts, fund facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

BMO Life Assurance Company is the issuer of the BMO Segregated Funds individual variable insurance contract referred to in the Information Folder and the guarantor of any guarantee provisions therein. The BMO GIF Information Folder and Policy Provisions provide full details and govern in all cases. BMO GIF products are offered through BMO Life Assurance, a separate legal entity than BMO Global Asset Management and wholly owned by BMO Financial Group. Segregated funds are only available for sale by individuals with appropriate insurance licences and are not considered a mutual fund. Segregated fund fees are higher than mutual funds as they include insurance fees to provide for the guarantees on deposits at maturity or on death.