US equities (^GSPC, ^DJI, ^IXIC) are moving higher ahead of the Federal Reserve's FOMC meeting on Wednesday, March 20. Some financial firms have lowered their targets for interest rate cuts from the central bank, opening up the potential for more trading momentum.

Northwestern Mutual Wealth Management Company CIO Brent Schutte joins Yahoo Finance to discuss the Fed's potential policy decisions, how they may impact the market, and gives his insights into the cyclical market themes investors should keep in mind.

Schutte warns on the dominance of AI hype that has captivated markets: "If we wake up five years from now, and the same theme is out there, it would be highly unlikely that that would occur. History would suggest that that's not going to be the case. AI is probably like the internet of the past... Today's winners won't necessarily be tomorrow's winners. In every economic cycle in the past going back to 1981, has had different leadership in the next economic cycle. And that's why I want investors to make sure they stay diversified... At least historically, at the end of the cycle, like we are right now... typically the leaders of the past cycle become the laggards of the next cycle."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

SEANA SMITH: Futures rising this morning ahead of the Fed's March meeting later on this week. Now, investors eagerly awaiting the release of the Fed's quarterly dot plot to give some insight on the Fed's rate cut expectations. Optimism for an early cut is waning after recent data showed that inflation remains sticky. Goldman Sachs cutting its rate cut forecast to three cuts down from four. So can this week's meeting bring some momentum back to the markets?

We want to bring in Brent Schutte. He's Northwestern Mutual's Wealth Management Company chief investment officer. Brent, it's great to have you here. So the setup here heading into the Fed decision on Wednesday, of course, that focus is going to be on the dot plot. What are you expecting to hear? And then how should investors position themselves ahead of that?

BRENT SCHUTTE: Yeah, so I think a lot of the rally that we've seen since late October of last year has been positioned on or based on the premise that the Fed would cut rates aggressively. And you're right, you have seen that dial back. And I think you'll continue to see that dial back. I expect Chair Powell to be a bit more hawkish. You're seeing inflation move in the wrong direction.

And so last week's CPI, for example, you saw the median CPI from the Cleveland Fed. It pushed higher. You've seen sticky CPI push higher. In the services side, which is so key and so vital to getting inflation lower, it actually bottomed on a year-over-year basis last July, August area. And it's been moving higher since, even when you exclude shelter, which has kind of been the fly in the ointment. And so to me, all in all, I expect a more hawkish Fed, and I expect the market to have some difficulty because it's been based upon a more dovish Fed, which we've seen in the past.

BRAD SMITH: And so with that in mind, Brent, as we're kind of also lingering on every word that Powell has to say in the press conference afterwards, what do you think it is that the markets would pay most attention to at this juncture?

BRENT SCHUTTE: I think a lot of the confidence in what he's looking for. And to me, he looks for the data. And the data, as I mentioned before, aren't supporting that. And so to me, it's more along the lines of, what does he think-- what picture does he paint of the future? And he's been expressing confidence, saying rate cuts are around the corner. And to me, I think that keeps getting pushed out further.

And the Fed dot plot could only show two rate hikes, which I think would be kind of-- rate cuts, I should say. You were seeing hikes the last couple of years. Rate cuts for 2024, which I think would obviously be a bit of a shock to investors.

SEANA SMITH: Brent, what do you think of just overall valuations? Here we are not too far from the record highs. Of course, a lot of the focus on the AI frenzy is going to be placed on what we hear from NVIDIA over the coming days. How do you see that playing into the market's momentum here? And how much is it that that is the driving factor versus what the Fed does?

BRENT SCHUTTE: Well, I think the Fed ultimately becomes important because they're going to end up causing a recession. And I haven't seen too many markets that do well during recessions. And so I think that ends up, you know-- obviously, more important, longer term, what path does the economy take? To me, the market's expensive in many parts, but especially when you see bond yields opposite that are now attractive.

And so, you know, I think the good news, though, is that there are parts of the market that have already discounted or have been paying attention to and paying heed to a recession, such as small and mid-cap stocks, which I'm not suggesting won't go down if there is a recession. But I think much like what happened post-2000, 2001, where you had a very similar setup with large caps drawing in investors' attention, people wanting to concentrate there, the next, you know, five, six, seven years of that next economic cycle were much better for small, mid-value, and even international stocks.

BRAD SMITH: Would a major pullback, Brent, be more due to recession or more due to a bursting of an AI thematic bubble?

BRENT SCHUTTE: Could be each. I think to me, more so along the lines of the pullback is more along the lines of recession. And I think perversely, it's probably hit its hardest in those top names. Look, if we wake up five years from now, and the same theme is out there, it'd be highly unlikely that that would occur. History would suggest that's not going to be the case.

AI is probably like the internet of the past. I think we're still unknown who's going to win. I think it's going to be a big theme. But today's winners won't necessarily be tomorrow's winners. And every economic cycle in the past going back to 1981 has had different leadership in the next economic cycle. And that's where I want investors to make sure they stay diversified because no one knows for certain what the next theme is. And at least historically, at the end of the cycle, like we are right now where you see this blow off top, typically, the leaders of the past cycle become the laggards of the next cycle.

BRAD SMITH: It was really interesting. There were some data out from FactSet at the end of last week that said that we've reached the second highest number of S&P 500 companies, citing AI on earnings calls over the past 10 years. They go further and say, the information technology sector had the highest number, 52, and in percentage, 85% of companies citing AI on Q4 earnings calls. How long do you believe that continues to be one of the prevailing themes here?

BRENT SCHUTTE: I think the theme stays. I think the question is, who wins? And so to me, that's why every time I come on these shows, and I hear the AI stuff, and I hear whatever, I kind of find it hard to believe in doing this in 30 years. But I have flashbacks to 2000, and I think, you know, the good news for you all is in the next, you know, three or four or five years, you're going to be talking about something different because everything changes in each economic cycle.

And what was in short supply or in kind of short investor demand the last cycle becomes the next kind of thematic thing that you're going to see in the future. AI probably stays as a driving theme, just like the internet did. But '01 to '07 saw very different leadership from those AI names. In fact, technology stocks back then were the kind of cores of the US large cap market pushing to new highs, to record highs in 2000.

I want investors to remember it took 17 years for the tech sector post-2000 to make new highs. It took Microsoft, I believe, 15, 16, 17 years to make new highs. It doesn't mean they're bad companies. They're actually great companies. The internet became a real thing. But was it already priced in? And that's where I think we're at today.

BRAD SMITH: All right, well, if there's any truth to what Elon Musk was telling Don Lemon in the interview that aired this morning, maybe we'll be talking about flying cars in the next three to five years. Who knows?

BRENT SCHUTTE: Could be.

BRAD SMITH: Yeah. Brent, thanks so much for taking the time here this morning.

BRENT SCHUTTE: Thank you.

BRAD SMITH: Really appreciate it.