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Patience in a volatile market like this year’s is a tall order. But it is the recipe for long-term success espoused by institutional investors in Barron’s latest Big Money poll. Big Money respondents are relatively negative about the near-term trajectory for financial markets, but optimistic about opportunities over the longer term, given the most attractive entry points in years for both stocks and bonds.

Our latest survey finds 40% of money managers bullish about the outlook for stocks over the next 12 months, and 30% bearish. The bullish cohort has increased from 33% since the spring edition of the poll, which found a plurality of managers neutral, but the bearish contingent has also grown from 22%. The S&P 500SPX –2.37% index has fallen 14% since the spring poll was published in late April, and is down 23% for the year.

The bulls evince genuine enthusiasm for stocks and see a smart recovery in the offing. Based on their mean predictions, they expect the S&P 500 to gain 15% through June 30, 2023, and 22% by the end of next year. Bullish investors see the Dow Jones Industrial AverageDJIA –1.34% adding 19% through the end of 2023, and the Nasdaq CompositeCOMP –3.08% picking up 30% by then.

Even the bears think most of the pain is over. They predict that the S&P 500 will decline by 8% by the middle of next year, then rebound to finish 2023 just 4% below recent levels. Their average estimate calls for the Dow to end next year down 2%, and for the Nasdaq to be roughly where it is today.

“The longer your time horizon as an investor, the greater your competitive advantage,” says Ted Bridges, CEO and chief investment officer of Omaha, Neb.–based Bridges Trust.

In interviews, many Big Money managers sound more bullish than survey results suggest. Markets might stay volatile and challenging for the next year, but opportunities abound to scoop up quality stocks at cheap valuations. For investors whose time horizon extends well beyond a year, the current environment looks to be a gift.

If you’re too early or too late by six months to a year, you say, ‘Well, darn, I wish I could have done better,’ ” says John Guerard, director of quantitative research at McKinley Capital Management in Anchorage, Alaska. “But as an investor, you want to get the three- to five-year period right, because that’s when you’re going to make your money. And we’re confident that returns over the next three to five years will be substantial.”

Guerard and Dimitrios Thomakos of the University of Athens looked at every six-month period in the history of the Dow industrials going back to the Dow’s establishment in 1896. Given its loss of 15.3% in the first half of 2022, the period ranked in the top 10% of the worst six-month stretches ever. Guerard, whose firm manages $2.4 billion, found that after almost every six-month span with a loss of that magnitude, the Dow was meaningfully higher three years later—by an average of 23.3%.

he S&P 500 began 2022 trading at about 23 times forward earnings. Its valuation has dropped in the ensuing months to about 15 times projected profits, with price/earnings ratios contracting by even more for many companies. Still, about 40% of Big Money poll respondents still call the market overvalued, while 22% now think stocks are undervalued.

Stocks and bonds have traded in lockstep this year, declining for three consecutive quarters. Typically, the two asset classes trade inversely to each other, which means that bonds haven’t provided much ballast of late. “It has been a painful process, but this is the time you want to be an investor,” says Richard Alt, chief investment officer at Carnegie Investment Counsel, near Cleveland. “I’d much rather be putting money to work at 10 or 12 times earnings than 23 times earnings, and get the chance to earn something from bonds.”

The fall Big Money poll drew responses from 107 investors from across the U.S. The latest survey, conducted with the help of Beta Research in Woodbury, N.Y., closed in early October.

Investors blame the Federal Reserve and its fight against inflation for their recent wounds. The U.S. central bank has aggressively raised interest rates this year to curb inflation, while reducing its holdings of U.S. Treasuries and mortgage-backed securities. More than a quarter of poll respondents consider rising rates the biggest investment risk in the coming year, and only 14% expect the Fed to be able to pull off a “soft landing,” bringing inflation down without sparking an economic recession.

“They should have started tightening a long time ago, when consumer prices started going up so dramatically,” says Gloria Bohannon, president of Herbert R. Smith & Co. in Witchita Falls, Texas. “But they waited too long, and now they’re having to raise rates too quickly…. The market seems to expect that rates may come down next year, but we don’t think that’s going to happen.”

Poll respondents, on average, expect U.S. real gross domestic product to be about flat in 2022, and up only slightly in 2023. Most see the consumer price index, or CPI, increasing by 6% to 8% in 2022, before growth in prices eases to about 3% to 5% next year. That would still be well above the Fed’s 2% inflation target.

“I am fearful the Fed is pushing the brakes too hard,” says Alt. “If all they are looking at is inflation, then they’re going to keep hiking until something breaks. There is a limit to what the economy can handle when you lift interest rates too high, too fast.”

Big Money investors are sitting on more cash than usual, waiting for greater buying opportunities. Twenty-two percent of respondents called cash the most attractive asset class today, with 42% citing equities and 14% bonds. “We think we’re not quite at what will be the market bottom, so we’ve remained cautious and defensive,” says Erica Snyder, president and CEO of Hunter Associates in Pittsburgh. “The most important thing in this environment is quality and consistency of earnings, earnings growth, and free cash flow.”

Snyder’s firm, which manages about $2 billion, is overweight healthcare stocks due to their defensive attributes and steady businesses. People still need to access healthcare, regardless of what interest rates, inflation, or GDP are doing. Snyder is the favorite sector of 20% of Big Money poll investors.

Poll respondents predict that U.S. crude oil will trade for $89.36 a barrel a year from now, about where it’s changing hands today. That would continue to boost sales and earnings of energy companies—Big Money investors’ favorite sector, at about 26%. Bohannon owns the oil majors Exxon Mobil XOM –2.63% (ticker: XOM), Chevron (CVX), and ConocoPhillips (COP), while Bridges favors producer EOG Resources (EOG). The Energy Select Sector SPDRXLE –3.73% exchange-traded fund (XLE) includes all energy stocks in the S&P 500, while the iShares U.S. Oil & Gas Exploration & Production ETF (IEO) is focused on upstream oil-and-gas companies.

“We’re looking for those businesses that [Warren Buffett] likes to call ‘inevitables,’ ” says Bridges, whose third-generation family firm manages about $7.5 billion. “The stock market is going to mark their prices up and down, but their underlying business value is going to proceed at a pretty decent rate over time….So, the stock might be down 30%, but it’s unlikely that the true intrinsic value of the business is.”

Bridges points to several stocks that he believes fit that mold, including Alphabet (GOOGL), Old Dominion Freight Line (ODFL), PayPal Holdings (PYPL), Thermo Fisher Scientific (TMO), and SVB Financial Group (SIVB).

There are also investment opportunities in several long-term trends that will unfold beyond the current economic cycle. Peconic Partners’ President and CEO William Harnisch sees opportunities in infrastructure, namely in upgrading the aging U.S. electrical grid to support a clean energy future.

Completely decarbonizing the U.S. economy will cost as much as $4 trillion through 2050, according to an estimate by utility giant NextEra Energy (NEE). That will boost the fortunes of Quanta Services (PWR), which installs electricity infrastructure, and Wesco International (WCC), which distributes electrical and communications products, predicts Harnisch. Wesco and Dycom Industries (DY) also are benefitting from more investment by wireless companies in next-generation 5G networks.

Herbert R. Smith’s Bohannon likes the shares of hydrogen producer Plug Power (PLUG), as well as copper miners Freeport-McMoRan (FCX) and Southern Copper (SCCO). She sees a coming shortage of the conductive metal as the transition to electric vehicles and renewable energy sources significantly increases demand.

Carnegie’s Alt is looking to buy stocks trading at discounted valuations and offering attractive dividend yields. He points to JPMorgan Chase (JPM), which fetches nine times forward earnings and yields 3.7%; T. Rowe Price Group (TROW), at 13 times earnings and yielding 4.7%; and AbbVie (ABBV), at 12 times earnings and a 3.9% yield.

Nearly two-thirds of Big Money investors expect the U.S. to be the best-performing stock market in the next 12 months, while 13% favor emerging markets, and 11%, Europe. Emerging markets are getting interesting from a valuation standpoint, says Snyder, with many countries further down the path of normalizing rates than the Fed or European Central Bank.

But EM stocks might not work until the Fed pauses its rate hikes. Half of poll respondents expect the dollar to weaken over the coming year, which would be a tailwind for non-U.S. investments.

More rate increases seem assured after the government released September inflation data on Thursday. The U.S. consumer price index rose 0.4% in the month, and is up 8.2% for the year. The trend is unnerving for politicians, as well as consumers; this marks the last inflation report before Americans vote in the midterm elections on Nov. 8.

Some 86% of Big Money investors expect Republicans to win a majority in the U.S. House of Representatives next month; 52% predict the Democrats will win a majority in the Senate. Respondents aren’t worried about gridlock in Washington: More than half say that split control of Congress is the best outcome for the stock market. Inflation is the most urgent economic issue facing the next Congress, according to our poll, followed by immigration reform.

Big Money investors aren’t overthinking the fixed-income side of their portfolios. Some 39% called U.S. Treasuries their favorite category in the sector, followed by U.S. investment-grade corporate bonds at 20%. They’re keeping duration short, at nearly two-thirds of their combined allocation.

With a one-year U.S. Treasury bill yielding a risk-free 4.4% today, it’s a different world in fixed income than in most of the past 15 years. “We don’t need to be heroes and go for junk bonds just to put up some good numbers from fixed income again,” says Alt. “You don’t need to take much risk to put together a very good, quality income portfolio.”

As the Fed approaches the end of its rate-boost cycle, it will become appropriate to begin gradually extending duration, Big Money investors say, locking in some of the yields on offer for several years. We’re not there yet: Almost two-thirds of poll respondents expect a peak federal-funds rate of at least 4.5%, versus the current target range of 3.00% to 3.25%.

“One of the positives for investors is that, in a more normalized interest-rate climate, they can actually earn income on their fixed income again,” says Snyder. “When we look forward over the next decade, that may be one of the biggest opportunities.”