FA Magazine May 2024 | Page 45

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Does The Growth Rally Have Extra Innings ?

Market strategists evaluate the crowd enthusiasm and ponder a pivot to value .
By Christopher C . Williams

WILL ARTIFICIAL INTELLIGENCE change everything , including how we value stocks ? Forget baseball . This spring it ’ s the artificial intelligence question at the top of financial advisors ’ minds when they ’ re trying to determine the endurance of the record-setting stock rally . Do big capitalization stocks such as Nvidia and Microsoft have the staying power to keep fueling the strength in growth stocks overall ?

To continue the national pastime metaphor , there are many more innings to go in the rally in growth stocks — if the economy has a soft landing , if the Fed cuts interest rates and if AI firms and others continue to produce solid earnings , as they are all expected to do . But make no mistake : Stocks ’ journey higher this year will be pockmarked with volatility and buffeted by many crosscurrents , namely inflation .
Furthermore , given growth ’ s surge and pricey valuations , it might be prudent for advisors to trim the growth holdings in their clients ’ portfolios and funnel some profits into value ( those equities trading below estimates of the companies ’ intrinsic value ). This will offer clients diversity while they ’ re still participating in the overall rally . Contrarian value plays such as real estate , energy and utilities are the favorites of some of the top strategists .
“ The challenge [ in evaluating the market ] this time is we have the Magnificent 7 stocks , and AI is here to stay and could really drive growth stocks , especially in a presidential election year ,” says Adam Lampe , chief executive officer and co-founder of Mint Wealth Management , a Houston firm .
The S & P 500 has gained 27 % over the past year , and it hit a record 5,248 in March . Jimmy Lee , CEO of the Wealth Consulting Group , a Las Vegas-based RIA with $ 7.9 billion in client assets , sees the index returning between 10 % and 20 % this year . “ I believe we are literally in the national anthem stage of AI [ investment ], meaning we ’ re just getting started ,” he says .
Filling up the AI bandwagon , some Wall Street brokerage giants are raising their 2024 forecasts for the S & P . Wells Fargo , the biggest bull , forecasts 5,535 .
As they seek value opportunities , advisors and investors must be mindful that growth has been a stalwart performer against its value cousin . Over the past year , growth has returned 32.85 %, outrunning value ’ s 20.30 % gain . And , as of April 15 , 2024 , the Russell 1000 Growth index returned 17.18 % on an annualized basis over the previous 15 years , while the Russell 1000 Value index turned in 12.11 % over the same period , so value isn ’ t exactly cheap either .
Overall , the broader market is trading at a 3 % premium to Morningstar ’ s fair value estimate , according to David Sekera , the firm ’ s chief market strategist . Specifically , growth stocks commanded an 8 % premium to Morningstar ’ s fair value as of March 22 . And six of the big-cap Magnificent 7 , which includes Tesla
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