By Teresa Rivas

In recent years, growth-oriented investors have been able to put their allocations on autopilot, given the dominance of just a handful of megacap tech stocks. Yet tomorrow's winners might not look like yesterday's.

That is according to Mike Smith, senior portfolio manager and head of the Growth Equity team at Allspring Global Investments. Smith's large- and all-cap funds do have some exposure to the Magnificent Seven-- Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla--but he is generally underweight those positions compared with the S&P 500. At some point, he believes, those stocks' performance will revert to the mean, with their gains returning to their long-term averages.

"The setup for the next 10 to 20 years looks different than the past 5 to 10 years," he says, and the "lazy trade," of just buying and holding the Magnificent Seven won't always be investors' best bet. Even considering the huge impact of artificial intelligence, he says, the stocks' "extraordinary outperformance isn't sustainable forever."

Luckily, they aren't the only game in town. One way Smith identifies holdings for his funds, which span small stocks to megacaps, is to find ways to play the three D's: debt, demographics, and disruption.

The amount of debt the U.S. government has taken on has come into relief recently as Congress hammers out the latest tax and spending bill. Smith argues that at some point, the amount of debt, and the interest required to service it, will limit growth, saying that "at minimum it represents an overhang."

Payments of interest already outstrip defense spending, so if there is ever political will to tackle it, tough choices will have to be made. That means investors should look to what is essential as they seek to pick stocks.

Quanta Services fits that bill, he argues. "Electricity is oxygen in today's world, because everything is digital," he says, even before getting into AI's huge need for power.

Quanta is attractive because the company isn't a utility but a specialist in construction services for utilities--something very few companies provide at scale, Smith says. Its size means it can attract and retain the most talented workforce, while investing in new equipment that makes it competitive. A backlog of orders at $27 billion, and growing quarterly, shows that it works.

On the demographic front, it is obvious that the U.S. is an aging nation, and the baby-boom generation is entering a period in which their spending on healthcare is going to rise drastically. Boston Scientific focused on age-related businesses, putting it "squarely in the bullseye" of the trend and providing predictable long-term growth.

Of course, debt and demographics are both a numbers game. Anyone who takes the time to look and think can get a sense of where trends are heading.

Disruption is different, which goes a long way toward explaining why Nvidia has done so well. When no one knows who the most successful users of artificial intelligence will be, the pick-and-shovel providers that sell to everyone look like safer bets.

Nonetheless, Smith says the one thing he knows for sure is that enterprise customers, who account for the lion's share of spending, have security as their top priority. "They're obsessed with making sure they protect their data, and not become a victim of an attack that cripples the company," he says. "They're motivated by fear because they've seen enough instances where that's happened."

Security provider Cyberark Software is a clear winner in this regard, he argues, because as AI becomes increasingly integrated into every corner of businesses, companies will have more areas that they need to defend from bad actors. "They're building the tools so that a chief security officer at a company can look at a single pane of glass to see who's in the system, and shut down any bad guys."

Overall, Smith says that the macro backdrop makes it an appealing time for investors to look into growth. With U.S. gross domestic product increasing at a moderate rate, it's a great setup for growth outperforming value in general: In a low-growth environment, companies that do show growth can command a premium.

Still, identifying which ones will be winners requires more than just relying on what worked in the past.

Write to Teresa Rivas at teresa.rivas@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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June 06, 2025 14:42 ET (18:42 GMT)

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