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MARKET CHOP AN OPPORTUNITY FOR US LARGE CAPS, WELLS FARGO SAYS

Markets may be subject to more volatility this year, which features midterm elections, a new Federal Reserve chairman, and the potential for the fourth full year of a bull market following three straight years of S&P 500 .SPX 15%+ gains.

"Underneath negative headlines, we see good news for equity markets. Markets continue to show signs of rotation and broadening out. The Russell 2000, Russell Midcap, and the S&P 500 Equal-Weighted Index are all outperforming the market-cap-weighted S&P 500," writes Doug Beath, global equity strategist at the Wells Fargo Investment Institute (WFII), in a note out on Wednesday.

He adds, "These signs have been consistent with our expectations that economic growth will accelerate this year."

Beath says that economically sensitive areas of the market have also been outperforming globally. Similar to the U.S., developed- and emerging-market stocks have been led so far this year for the most part by cyclicals, which is also consistent with an accelerating global economy.

Volatility in the technology space has been a dominant theme this year, but Beath says WFII remains positive on AI broadly.

Beath's bottom line is that the rotation within the market is a prelude to broad equity gains this year. He believes the current chop is "an opportunity for new cash in U.S. Large-Cap Equities and the Financial sector."

He says that WFII also upgraded Emerging-Market stocks last year to neutral as the benchmark index, the MSCI Emerging Markets Index, is heavily skewed toward cyclicals.

"Going forward, we'll continue looking through headline volatility to focus on the economic and earnings improvement that we expect," Beath writes.

(Terence Gabriel)

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