Beyond the mega-caps: Brandywine's Kaser shares next opportunities for equities

As equity markets grapple with high valuations, tariff uncertainties, and the Fed’s next moves, advisors should broaden their search for opportunities in equities, beyond the lure of mega-caps.

Patrick Kaser, portfolio manager at Brandywine Global, sees a mix of catalysts and risks that could shape the path forward and has shared his outlook with InvestmentNews on potential upside, where vulnerabilities lie, and which sectors may offer opportunities amid volatility.

“For markets to reach new highs, they’ll probably need some combination of a Fed cut in September, accelerating evidence of OBBBA-driven spending by companies, stability on the tariff front, the absence of consumer spending weakness, and additional evidence that tariffs won’t drive inflation,” he says.

But against a backdrop of elevated valuations, risks are never far away and today’s environment may magnify vulnerabilities.

“Given high valuations and tight credit spreads in the market, there are a large number of small-to-medium risks that could leave the market vulnerable,” he notes.

Kaser explains that the risks include inflation pressures filtering through to consumers and yields on 10-year Treasuries rising to 4.5%. Other potential pitfalls include tariff policy, signs that “AI hype may be a little early in generating results,” and weakening consumer spending.

“Earnings have been stronger than expected, and the OBBBA seems to lower recession risks,” Kaser says, adding that the impact of tariffs may not yet be fully priced in. “We haven’t really seen the impact of most tariffs yet between pauses and on-the-water exceptions, so this fall carries additional tariff risk.”

Despite the uncertainties, Kaser is finding opportunities, particularly in areas where valuations are more attractive. Health care for example, has both attractive valuations and poor sentiment and he sees potential in both biotech/pharma and managed care, together with select opportunities in financials and chemicals.

“We think the regulatory positives for big banks leave more opportunity for select names in that group. Within chemicals, we see some opportunities as there has been an extended downturn in some segments,” he says.

For clients and their advisors seeking to position portfolios amid heightened volatility, Kaser suggests looking toward traditional defensive sectors.

“There is a definite sense of complacency around risks to the market, in our view,” he says. “Right now, there is the opportunity to get below-market valuations in sectors that are traditionally more defensive, such as Health Care, Staples, and Utilities. These seem like areas to provide some relative cover in a downturn.”

Looking to the remainder of 2025, Kaser sees shifts in market leadership.

“Momentum had a fantastic year in 2024, a terrible Q1, and a great Q2,” he says. “There are signs that the momentum trade is faltering again; this too would be good for equal-weighted approaches or really anything other than having the concentration at the top of the market.”

That concentration is something he views as a structural risk.

“The concentration in the broad indexes is at record levels and introduces risk,” Kaser concludes. “We think the setup is one where the average stock is more likely to outperform the market overall, and small caps may finally have their day in the sun.”