Brent Schutte on Market Concentration, Tariffs and the Case for Diversification
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Northwestern Mutual CIO Brent Schutte joins Excess Returns to discuss why the next phase of the cycle may reward breadth over concentration, how tariffs could simultaneously slow growth and lift inflation, and why the 60/40 portfolio needs real-asset ballast. Below are the key take-aways for Australian investors and traders.
- Both sides of the Fed’s mandate are at risk. Tariffs act as a tax on growth while fiscal stimulus and potential Fed easing could re-ignite inflation. Portfolios must hedge against both weaker labour markets and stickier CPI.
- Less than 47 % of US industries are hiring. Historically, when breadth narrows to this level the economy is in or near contraction. AI-related capex has so far offset the rolling recessions in housing, manufacturing and small-caps—but the cushion is thinning.
- Concentration risk is extreme. The “Magnificent 7” account for ~34 % of the S&P 500, rivalling 1999 and 1973 peaks. Schutte warns: “Asset classes don’t die, companies do.” Equal-weight and small-/mid-cap indices have outperformed over 25-year windows even after the recent large-cap surge.
- Valuation matters. On multiple metrics US large-caps are the second-most expensive since the 1880s. Small- and mid-caps trade at their cheapest relative multiple since 1999.
- 60/40 is not dead, but it needs help. Bonds now yield 4–6 %, improving their risk-return profile, yet inflation-linked commodities hedge the other tail. In the five years since 1926 when both stocks and bonds fell, commodities rose double-digits in four.
- Dollar strength is cyclical. Purchasing-power-parity indicates the USD is expensive; a reversal would favour unhedged international equities and Australian-dollar-denominated assets.
- Process over prediction. Schutte’s core message: “If I knew exactly what was going to happen on Thursday before Labor Day, I would not be doing this interview.” Build portfolios that can survive multiple macro paths rather than betting on a single outcome.
Chart pack: key markets to watch
Bottom line Diversification is out of fashion precisely when it is most needed. Maintain exposure to the mega-caps, but balance the equity sleeve with equal-weight, small-/mid-cap, international and real-asset positions. Use the current narrow leadership as an opportunity to rebalance rather than chase.