Navigating today’s market won’t be easy, but is it ever? Investors have to deal with one of the most feared economic environments out there, a term that economists thought they’d never use again: Stagflation. Defined as a cycle of flattish economic growth through gross domestic product (GDP) and sustained high inflation, the U.S. economy is at a crossroads. 

The Federal Reserve (the Fed) has a decision to make: cut interest rates this year and risk another cycle of high inflation or keep rates high and risk further disappointing GDP data, such as last quarter’s 1.6% growth rate. Investors will get a glimpse into what the Fed is looking at – and looking for – to make this crucial decision.

While the U.S. stock market gets its house in order, investors like Warren Buffett and Ray Dalio have found more attractive opportunities in some of the world’s most exciting emerging markets without all the stagflation and Fed drama. Far from blindly following the big money, here’s why investors should dissect all of the above. 

It’s a Divided Cycle

Typically, the U.S. economic cycle is driven by two main sectors: manufacturing and services. After expanding every month consecutively since 2020, the ISM services PMI index had its first contraction reading in April, worrying shareholders in areas like the technology sector. 

With stocks like Nvidia Co. (NASDAQ: NVDA) and any company exposed to artificial intelligence attracting the market's attention, a word of caution must follow. Now that services are beginning to contract and GDP is slowing, a new party could be starting somewhere else. 

The Industrial Select Sector SPDR Fund (NYSEARCA: XLI) could be one of those places. Why? Industrial stocks have outperformed the Technology Select Sector SPDR Fund (NYSEARCA: XLK) by as much as 6.5% over the past quarter, showing investors where the money is going. 

Analysts at The Goldman Sachs Group expressed their view around a manufacturing breakout for this year, a thesis found in the bank’s 2024 macro outlook report. Because of stagflation, the Fed may choose to cut rates to target employment growth in manufacturing; here’s how.

Lower rates typically mean a weaker currency, and a weaker dollar could make American exports more attractive. That's why stocks like Alcoa Co. (NYSE: AA) and its peers in the metals industry have Wall Street analysts projecting up to triple-digit earnings per share (EPS) growth this year.

Nvidia and investor favorite Apple Inc. (NASDAQ: AAPL) bring only 12.6% and 8.9% growth, respectively. Even other exciting tech firms like Netflix Inc. (NASDAQ: NFLX) and Airbnb Inc. (NASDAQ: ABNB) have seen double-digit declines after posting first-quarter 2024 earnings.

Others in the manufacturing sector, like FMC Co. (NYSE: FMC), rocked investors by rallying up to 20% after earnings, giving markets more evidence to back the manufacturing space over services. 

Where Investors Can Still Find Growth

Even though the U.S. manufacturing sector offers an attractive proposition for those looking to beat stagflation, there are better opportunities to cushion any Fed uncertainty. 

Once upon a time (low interest rates of 2020-2022), the so-called ‘magnificent 7’ stocks were the place to be. However, other manufacturing stocks like ATI Inc. (NYSE: ATI) and Mueller Water Products Inc. (NYSE: MWA) have beaten these mag 7 names by double-digits in the past quarter!

But, if being exposed to stagflation still keeps some on the edge of their seats, here’s where Buffett and Dalio chose to invest. Noticing cyclical – even generational – discounts in the Chinese stock market, Alibaba Group (NYSE: BABA) became a target in Dalio’s buying of the iShares MSCI China ETF (NASDAQ: MCHI). 

Jumping into the Chinese market also comes Michael Burry (yes, the guy who called the 2008 financial crisis). Now, one of his most significant holdings, a $5.8 billion investment into Alibaba, means the deep-value investor sees a bright future for one of China’s leading blue-chip companies. 

Analysts must have a reason for projecting price targets up to $124 a share, as Citigroup analysts dare Alibaba stock to rally by nearly 60%.

Alibaba was also a target for Buffett’s former partner, Charlie Munger. However, Buffett isn’t done playing Asia’s market, as he has recently boosted his stakes in Japanese financial stocks. 

If trusting the numbers out of foreign companies seems too risky, investors can follow Japanese stocks through the iShares MSCI Japan ETF (NASDAQ: EWJ). 

One thing is sure: if these markets are good enough for some of Wall Street’s best, they should be good enough for investors to cushion some of the slower U.S. growth and interest rate uncertainty risk.

The article "3 Things You Should Know Going Into 2Q 2024" first appeared on MarketBeat.