An improving U.S. economy is helping small-cap stocks outperform large, multinational ones, which will continue to be the trend as long as overseas growth remains in the doldrums, a top investment strategy told CNBC.
"The fundamentals of the U.S. economy are improving, and we're about the only major economy you can say that about," Rich Bernstein of Richard Bernstein Advisors said Thursday on "Squawk on the Street."
That dynamic is hurting the profitability of the big companies because, "the whole bet on foreign growth has come back to bite them."
Small caps, on the other hand, are benefiting from better demand in the U.S., and are not being hurt by the dollar's relative strength.
The slumping Dow Industrials — heavy with multinationals — partially reflects that pressure on profits, he said, although uncertainty over the "fiscal cliff" is also a factor, while the Russell 2000 as fared better.
Bernstein, speaking from the Schwab "Impact" investor conference in Chicago, said if Congress and President Barack Obama make "meaningful strides" on heading off the fiscal cliff—when tax hikes and spending cuts simultaneously go into effect on Jan. 1 —the markets will respond positively."
If not, his "ultimate hedge" is the 30-year zero-coupon bond. "The economy will slow," he said. "There will be scarcity of high-quality assets." (Read More: Fixed Income Outlook.)