A fund manager at $1.7 trillion Amundi Pioneer reveals how he's preparing in case stocks crash again - and outlines the risks that could plunge the market into chaos

CNBC

• John Carey, a Boston-based fund manager at $1.7 trillion Amundi Pioneer, discusses his strategy for guarding against another stock crash.
• He also outlines the market forces he's most closely watching in 2019, and discusses what's at stake as the market reaches a significant inflection point.

The stock market is at a key inflection point, and how earnings season plays out will go a long way towards determining whether investors will sink or swim in 2019.

So says John Carey, a Boston-based fund manager at Amundi Pioneer, which oversees $1.7 trillion. In a recent interview, he told Business Insider that the investment landscape has been flipped upside down by the volatility seen in late 2018, leaving stock-pickers like himself scrambling to sort through it all.

As a result of the chaos, Carey is doubling down on the core principles that normally inform his investing decisions. That means focusing on dividend-paying companies with good balance sheets - the types of stocks that normally thrive in an unstable, late-cycle environment.

To him, that's the best way to combat the type of runaway market that can lead to deep losses. In a scary-but-entirely-plausible scenario where equities suffer another sharp crash, he wants to be loaded up on fundamentally strong companies that can stand on their own two feet once the wreckage settles.

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"I'm going to be looking at balance sheets even more carefully, and emphasizing underlying earnings growth potential even more," Carey told Business Insider. "You want to make sure companies stay profitable and continue paying dividends, even if we head into a slump."

Given the recent violence in stocks, it seems to be a prudent approach. But until very recently, quality had taken a backseat to growth.

That's because mega-cap tech and other high-growth winners seemed unstoppable for so long, making performance-chasing investors a boatload of money over a multiyear period. When that was the case, it didn't really matter if a company's balance sheet was saddled with debt.

Now, given what's transpired, the pendulum may start swinging back the other way. Balance sheet strength could very well become a major concern for investors. That would favor people like Carey, who thrive during periods of turmoil due to the relative safety offered by their main stock picks.

Read more: Wall Street experts are ignoring major warning signs being flashed by the market - and their negligence could speed up the next stock crash

With all of that established, let's take a look at what's changed, and where we go from here. Here are the main issues Carey says will drive market action going forward:

Earnings growth

When it comes to earnings, Carey shares the same view held by much of Wall Street: It's not a question of if profit growth will slow - it's a matter of when, and how quickly. After all, the positive effect of the GOP tax law is wearing off, depriving stocks of a strong backstop.

Carey is most worried about earnings decelerating to an unforeseen degree. If that ends up being the case, he says all bets may be off.

"If there's a slowdown beyond what people expect, then all of a sudden people will look back at what the market was doing over the past quarter and realize that weak price action was legitimate," he said.

Political turmoil

When it comes to political strife, it's a pick-your-poison situation. There's the ongoing government shutdown, which is now the longest on record. And then there's President Donald Trump's trade war with China, which has raised for the better part of the last year.

"A deepening of the political crisis in Washington could make things unstable," Carey said. "The market doesn't like instability. That breeds uncertainty, which the market hates."

Mega-cap tech

If any specific part of the stock market is at a critical precipice, it's mega-cap tech. The likes of Facebook and Apple rode high for so long on the strength of the blistering growth they offered, but now the air is starting to seep out of the balloon.

Both companies - along with a handful of others - have warned that growth could slow this year, and the market has been ruthless and unforgiving with its response. Now the question becomes: Will they pick up where they left off, or is their growth story permanently tainted?

The answer to that could determine the direction of both tech stocks and the overall market.

"If you look at the performance through the middle of 2018, it was as if they were sucking the air out of the market and taking all the gains for themselves," Carey said. "Now that they've faltered, the question is whether there will be alternation into the value names and a broadening of interest, or if people will be scared of stocks in general and sell FANGs and not buy others."

A scenario where everything gets resolved

Given what's been outlined, one might conclude that Carey is bearish. But that's not the case. He's just wisely keeping an eye on all the negative forces that could further derail the market.

Carey acknowledges that if the headwinds above are resolved in satisfactory fashion, the nearly 10-year bull market could have much further to run. It's an outcome he's certainly not ruling out.

"Maybe things get settled in Washington, the government re-opens, and the trade situation gets figured out," Carey said. "Beyond that, if earnings are stronger, companies are more realistically optimistic with their forecasts, and investors regain some of their confidence, there's a possibility that things could turn around and bring people into the market."