Small-cap stocks, international equities, AI, utilities: Is it time to diversify your portfolio

January 08, 2025 at 11:08 AM EST

The U.S. stock market major indexes saw back-to-back 20% plus gains in 2023 and 2024. It’s been a rockier few weeks since Christmas for the equities markets and investors may be wondering whether now is the time to cash in some of those mostly large-cap gains and diversify into a broader portfolio of equities.

Brandon Thurber, chief market strategist at Regions Asset Management, says his group is tempering expectations for 2025. But he still thinks we can have a solid high single-digit, low double-digit year for the S&P 500.

I recently spoke to Thurber for an episode of my Money Life Podcast about his take on the market and whether investors should be considering more diversification right now. Here are four of the areas we highlighted for 2025:

International

“If you look back over the last 15 years, a global portfolio, U.S. stocks as well as international stocks in combination, has a lower volatility profile than just U.S. stocks in isolation or international equities in isolation,” Thurber said. “But that doesn’t really benefit an investor if you’re in a bull market and stocks are continuing to rise.”

“Trade tariff uncertainty is going to continue to have impacts on the U.S. dollar, interest rates, the inflation outlook. There’s a lot of moving parts here, so we still want to maintain some exposure there, but we want to have the bulk of our equity exposure in the U.S. large- and midcaps areas.”

Small- and midcap stocks

“Small caps are a harder argument. Midcaps are this in-between area where you have higher quality companies, you have companies that are paying dividends, growing dividends, free cash flow generators and on balance are less heavily indebted than small cap companies are,” he said.

Small-cap stocks, international equities, AI, utilities: Is it time to diversify your portfolio

“Midcaps are a higher beta way to play a continued solid, sound U.S. economic backdrop, but we don’t have to bank on a re-acceleration to still generate some nice returns,” Thurber said. “And those are also companies that are still capable of benefiting from an uptick in the M&A or mergers and acquisitions backdrop. Midcap is a much more appealing play; it’s a lower volatility way to play it than small caps, so you get the best of both worlds there.”

AI

“I think you want to maintain some exposure to those AI darlings, the names that got us here, the NVIDIAs NVDA of the world, the Microsofts MSFT , those sorts of names still likely have a place in most portfolios,” he said. “But they’re already very heavily owned, very heavily, with significant coverage by the sell side.”

“And so I think we’re in a backdrop here where everybody’s going to start kind of looking for these secondary or tertiary plays. To play artificial intelligence, the data center build-out, growth in the power grid or an improvement in the power grid, you’ve got all these different thematic ways that we think are going to continue to benefit over the coming years,” Thurber said.

Utilities

“I think there’s a lot of bifurcation in the utility space. Twenty years ago when I started my career, I cut my teeth as a utility stock analyst and it was a stodgy, slow-growth, high-dividend-paying industry that the only time anybody wanted exposure to it was for the dividend. There was really no capital-appreciation potential behind it,” he said

“Now fast forward to where we are today and it really does seem like there’s sort of this narrative shift where utilities aren’t all boring anymore. There’s some excitement there and there’s a very nuanced approach to these companies and from a geographic perspective [the companies] can actually answer the call as it relates to power generation and the increased demands that artificial intelligence is going to have on the grid,” Thurber said.

Listen to the full interview with Brandon Thurber.

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