U.S. equity managers are optimistic that the bull market will sustain itself for the rest of 1997.
The question is: Will large-capitalization stocks or lesser-known small- and midcap companies be the beneficiaries?
"We see the value in the next six months being primarily in names outside of the top 20 Standard & Poor's stocks," said Philip Schettewi, managing partner of Boston-based Loomis, Sayles & Co. The firm actively manages about $14 billion in U.S. equities.
Despite the attraction of certain large-cap companies, Mr. Schettewi foresees most of the second-half growth coming from the lesser-known stocks.
"Although I do like some of the larger cap stocks, such as IBM (Corp.), General Motors (Corp.) and Westinghouse (Electric Corp.), for the mostpart the growth area is in stocks beyond the top 20," he said.
"I think you'll see many more investment dollars flowing into stocks that haven't as yet attracted as much attention as the big names" such as VIAD Corp., an airline caterer, and Computer Associates International, a software firm.
Mr. Schettewi's view is shared by Jim Margard, chief equity strategist for Rainier Investment Management Inc., Seattle. "The most appealing area in stocks in the S&P 500 are those that are not as well known and have lagged by comparison to the big winners," he said.
"We aren't looking at sectors, in particular, but rather the individual stock opportunities that are out there. We believe in taking the best from both our value and growth investment strategies, as that approach works well in almost all market environments."
Among the stocks the firm likes are PNC Bank N.A., Marsh & McLennan Cos. Inc. and Tommy Hilfiger Inc.
Rainier Investment, which manages about $2.5 billion in U.S. equity, will be looking for small- to midcap stocks between $50 million and $5 billion.
Mr. Margard added it's unlikely the Standard & Poor's 500 Stock Index will repeat its first-half performance over the next six months. "At best, we will see a 5% growth in the second half," he said.
Snyder Capital Management, San Francisco, also expects to see increased interest in small- to midcap stocks. "I think the small-cap value area offers a lot of attractively priced stocks that have performed well over the last five years," said Walter Neimasik, vice president.
"Overall, I think everyone has been astounded by the relentless strength of the bull market. If only because of momentum, it will likely continue to go that way until something comes along to stop it."
Snyder Capital actively manages about $500 million in small- to midcap value U.S. equities.
Mr. Neimasik added his firm hasn't changed its predominantly small-cap strategy. Clients, he said, "understand that it (the market) is cyclical and remain confident of their strength over the long haul."
Not all managers share that enthusiasm for small-cap stocks.
"Our firm remains very bullish on the market, and we feel that larger-cap stocks remain very sound investments," said Harry Smith, partner at Harris Bretall Sullivan & Smith Inc., San Francisco.
"There remain fundamental business problems for many small-cap companies. Within the global investment market, it's very difficult for smaller companies to compete with the research and development, marketing, and distribution infrastructure of the larger companies. I primarily focus on the high-tech industries, and even though they have some smart people working for them, it's difficult for smaller firms to compete with the likes of Intel (Corp.) and Microsoft (Corp.)
"In other sectors, including the financial field, we also like various larger companies such as Bank of America and Merrill Lynch (& Co. Inc.)."
Harris Bretall actively manages about $1.2 billion in domestic midcap and large-cap growth equities.
Mr. Smith said his firm in 1990 predicted the Dow Jones industrial average would reach 10,000 by the year 2000. He now believes that mark may be reached even sooner, and that within the first decade of the next century, the market may rise beyond 20,000 points.
Aldin Stewart, executive vice president of Alliance Capital Management, New York, is only "cautiously optimistic" the market can retain much of its vigor through the second half.
"With sound economic underpinnings and low inflation, there's reason to be hopeful that the market will move forward," Mr. Stewart said.
Barring a bump in interest rates, he remains convinced that Alliance's growth-oriented mix of small-, medium- and large-cap stocks will perform well.
"We feel comfortable weighted into the larger-cap financial and technology sectors," Mr. Stewart said.
"Still, I think it's fair to expect some catch-up on the part of the small- and midcaps. We won't see growth of 15% this half, but there should be a continued move ahead."
Mr. Stewart manages predominantly midcap stocks. Alliance Capital actively manages approximately $42 billion in domestic equities.
Two potent issues determining the market's second-half performance will be "the V and V: valuation and volatility," said Jim Weiss, deputy chief investment officer of equities for State Street Research & Management, Boston.
"On the valuation side, the good news is that earnings have considerably grown so that most stocks are not very overvalued," Mr. Weiss explained.
"On the volatility side, the market is clearly more volatile than the period of 1994 to 1996. I believe that isn't an aberration, but rather a new fact of life that managers will have to deal with from now on. That makes it all the more important to identify investments consistent with our product mandates."
Mr. Weiss confirmed his firm's preference for the health-care and technology sectors, specifically large-cap companies such as Pfizer Inc., Eli Lilly & Co., Compaq Computer Corp. and Intel.
"Other sectors we like include cable television companies and the telecommunications equipment firms."
For Mr. Weiss, two potential hazards are the threat of inflationary pressure from overheated domestic and international economies and the political realignment of Europe.
State Street Research actively manages about $9.5 billion in domestic equities in multiple styles.
Charles Mayer, director of investments at INVESCO Capital Management, Atlanta, said the international market favors the larger-cap stocks. "Certainly the move towards globalization, and the increase in countries moving towards democratization, has created a huge increase in demand for U.S. products," he said.
INVESCO manages about $27 billion in active domestic equities in several styles.
Mr. Mayer said his firm is examining an array of sectors, including finance, health care and telecommunications.
"I think in the financial field that the insurance sector is a place to be now, and there are some interesting things happening in the energy sector as well.
"The Baby Bells have made some good moves as late, and despite competition, their ancillary services such as caller ID and message services should produce good growth."
But Greg McCrickard is skeptical on the merits of highly valued large-cap companies. As vice president of T. Rowe Price Associates, Baltimore, Mr. McCrickard is responsible for small-cap investments, and questions the argument favoring large caps.
"I think the argument that large-caps are well-established companies with name recognition is just an attempt to justify some of the high valuations," he said. "It looks as though a budget deal will be done in Washington, including a decrease in the capital gains tax rate. Combine that with the fact that small caps are coming off one of their worst performance periods in some time and there is good reason to believe we're due for a big bounce in small-caps. Historically, capital gains tax cuts have been very good for small to midsized firms. Also, after a poor first half, we're due for a snap back in for smaller stocks."
T. Rowe Price Associates actively manages about $24 billion in domestic equities, including a $500 million small-cap stock fund.
Mr. McCrickard also countered the argument that smaller companies can't compete in the global marketplace.
"A number of smaller companies, especially in the technology sector, have been able to establish very strong niches that they've exploited on a worldwide basis," he said. "I think in the second half investors will start saying, 'sure large-caps are safe but are they the best investment out there?"