It's a new reality for investors contending with the first interest-rate-hiking cycle since 2023. And it's the backdrop for the latest installment of Business Insider's quarterly "Where to Invest $10,000" series.
The Federal Reserve is fighting against inflation at a time when the Iran war is pushing energy costs higher. AI companies, meanwhile, are continuing to pour hundreds of billions into capex, and increasingly tapping debt markets to fund it.
The result has been a run of multi-decade highs in Treasury yields, reflecting a market that's worried not just about the Fed's next move, but America's ballooning debt and deficits.
We spoke to eight investing pros to find out where they're seeing the best opportunities right now as rate hikes collide with AI ambitions. If you have a chunk of money you're looking to invest, here's what they recommend:
Kriti Gupta, global investment strategist, JPMorgan Private Bank
Investing ideas: Utility stocks, industrials, defense, financials
Interest rates look poised to remain structurally higher, but US stocks seem resilient for now, Gupta told BI. She pointed to how the recent rise in yields has been spread out over weeks, and the broader move up has taken place over the course of this year, giving investors time to adjust.
Gupta said that the AI trade likely has more room to climb, especially considering how stock valuations have compressed recently amid the bond sell-off. Her allocation view is to be overweight US stocks over bonds.
In equities, she sees opportunities in four sectors: (1) utilities, a defensive play, (2) industrials, linked to the AI buildout, (3), defense, because of US government investment, and (4) financials, because higher rates will juice their interest income.
Funds that track these sectors include the Vanguard Utilities ETF, the State Street Industrial Select Sector SPDR ETF, the iShares US Aerospace & Defense ETF, and the iShares US Financials ETF.
Mark Malek, chief investment officer, Siebert Financial
Investing ideas: S&P 500, AI stocks, short-term US Treasurys, gold
Malek said he sees big risks looming for equities given the recent mix of economic data and the surge in bond yields. US and AI stocks still offer the best growth potential, but data points like weak consumer confidence show cracks in the economy's growth narrative, he said.
If the 10-year US Treasury yield were to stick around the 5.25% mark through the end of the year, more pain in stocks is likely, Malek added.
Siebert's $10,000 portfolio consists of four main parts:
- S&P 500 (30%): Malek cited continued strong earnings growth.
- AI stocks (20%): He expects tech revenue growth to hold up for at least another year.
- Short-term US Treasurys that mature in less than 5 years (35%): Malek sees them offering an ideal blend of protection and stronger returns amid higher rates.
- Gold or T-bills (15%): He says T-bills offer investors some dry powder in their portfolios to buy any dips in stocks.
Rob Haworth, senior investment strategist, US Bank Asset Management
Investing ideas: Global stocks, long-term bonds, global infrastructure
Haworth told BI that the recent surge in yields hasn't upended his view that equities will remain strong, thanks to robust earnings and the secular growth potential from AI.
Haworth said he would divide a $10,000 investment into three parts. He recommended allocating 65% of the cash to a "core of global equities" largely consisting of US and emerging-market stocks, which have the strongest earnings growth potential.
Next, he would allocate around 30% to high-quality long-term bonds, which can shield investors from stock volatility stemming from concerns about higher rates and hotter inflation.
Finally, he would put about 5% into global infrastructure investments to get exposure to the continued AI infrastructure buildout.
Kieran Osborne, chief investment officer at Mission Wealth
Osborne's recommendation is rooted in the Fed's new rate-hike regime.
In particular, he flagged private credit as a bright spot.
Private credit investments are often floating-rate and reset quarterly to reflect short-term interest rates, offering investors more income as borrowing costs rise.
Meanwhile, the economy is strong enough that corporate borrowers backing the loans can handle a slightly higher cost of debt, Osborne said. "The resilient economy remains supportive of underlying borrower fundamentals."
Interval funds invest in alternatives and private assets, and are partially redeemable on a quarterly basis. While that comes with liquidity risks (see recent private credit jitters at firms like Blue Owl), these funds offer robust returns that continue to rise as short-term rates tick up.
"Interval funds offer investor-friendly access to less liquid asset classes, like private credit," Osborne said.
Investors get to take advantage of rising rates while eschewing duration risk. Funds yield around an extra 5% annually on top of what the Fed fund's rate is, Osborne said. Today, that would be about 9%. Every three months, the coupons adjust based on where short-term rates are, he said.
"When the Fed increases interest rates, it actually drives increased income on that portfolio."
Melissa Cournyer, CEO of Konvex Wealth
Investing idea: Energy stocks and tech stocks
The thesis: Cournyer's recommendations for investors are similar to what she would have recommended at the start of Trump's second term, high interest rates or not: energy and the artificial intelligence explosion.
While both have seen large price appreciation for expected reasons (the increased need for energy to power AI) and unexpected reasons (the war in Iran), she said there's still "room to run."
Cournyer said persistently high inflation and interest rates, combined with rising oil, will continue to push energy assets higher. And if they don't, energy companies are still strong dividend payers.
Her practice focuses largely on retirement and pre-retirement and her clientele largely skews older. She said their continued adoption of AI is shows there's still money made in tech investments.
Examples of funds that offer exposure to specific hot AI themes include the Vanguard Energy ETF (VDE), the VanEck Semiconductor ETF (SMH) and the Global X Artificial Intelligence & Technology ETF (AIQ).
Kevin Khang, head of global economic research team at Vanguard
Investing idea: Actively managed growth funds
The Thesis: Khang says the market has come to a point where active management — or stock picking — matters more than it did when the AI tide was lifting all boats.
As the AI trade evolves, winners and losers are being decided among both hyperscalers and adopters, and concrete earnings growth is being rewarded, he said. The right kind of active management can beat passive indexes.
Companies "are all trying to actively evolve their business models and reposition themselves into another position of strength," Khang told Business Insider. "That inherently comes with a risk of executing well versus poorly, and that's precisely the type of environment where a good active manager could be adding value."
Examples of actively managed growth funds include the JPMorgan Active Growth ETF (JGRO), the T. Rowe Price Blue Chip Growth ETF (TCHP), or the Vanguard Wellington U.S. Growth Active ETF (VUSG).
Mona Mahajan, the head of investment strategy and asset allocation at Edward Jones
Investing idea: Communication services stocks and industrials stocks
Assuming your investments are already diversified, Mahajan said she'd put the money to work in two of her preferred stock sectors at the moment: communication services and industrials.
Industrials-sector stocks allow investors to catch the upside on a hot economy, with manufacturing activity expected to expand at a higher rate this quarter. The iShares US Industrials ETF (IYJ) is one way investors can gain exposure to the trade.
Communication services stocks, meanwhile, give investors exposure to the explosive growth in the AI trade. For example, Meta and Alphabet — two of the AI hyperscalers spending most on AI — are the two largest holdings in the State Street Communication Services Select Sector SPDR ETF (XLC).
Jason Draho, head of asset allocation Americas of UBS Global Wealth Management
Investing idea: Cyclical stocks and AI stocks
Within the AI trade, Draho highlighted cybersecurity as his top pick. Stocks in this space have gotten a boost recently amid headlines about rogue agents running amok and breaking into other companies, and demand for security software is expected to skyrocket in the coming years.
In the theme of cyclicals, Draho likes financials and the consumer discretionary sectors, in addition to industrials. He sees strong growth ahead, and all of these tend to benefit when an economy is booming. People borrow and spend more, and orders for new products pick up.
Plus, many investors are probably underweight in these areas of the market given how concentrated the AI trade has become.
Examples of funds that offer exposure to these trades include the Amplify Cybersecurity ETF (HACK), the Fidelity MSCI Consumer Discretionary Index ETF (FDIS), and the Vanguard Financials ETF (VFH).