INVESTING
and Microsoft along with AI chipmaker Nvidia , are fairly valued , notes Sekera .
When they look at the oft-used priceto-earnings ratio , the S & P is giving some advisors and investors ticker shock , as it ’ s trading at 24.79 times , up from 22.23 a year ago . Some strategists see the market growing earnings about 10 % this year .
One Wall Street favorite , Tesla , has fallen more than 36 % this year as of April 16 , and some other Magnificent 7 stocks like Apple are running out of momentum . Both those businesses have seen their revenues hit a wall .
“ The market is probably getting kind of stretched ,” argues Sekera , who recommends investors underweight growth and overweight value , which he estimates is trading at a 6 % discount to fair value . “ Over time , investors will realize better returns from the value category ,” says the strategist , who thinks advisors and investors should lighten up on sectors such as industrials , transportation and airlines .
Choosing between growth or value needn ’ t be a Beyoncé-or-Swift dilemma . A sensibly diversified portfolio should hold a bit of both equity classes . Morningstar ’ s top-rated and top performing mutual fund bets in either category are the Fidelity Blue Chip Growth Fund , which is up more than 50 %, and the Oakmark Select fund , which has returned 37 % for value investors .
Some bulls see promising earnings growth in the technology sector , which is benefiting from AI investment . “ In an environment in which recession continues to get postponed , then you should see the market broaden out and these other sectors participate , not at the expense of growth stocks or tech stocks , but alongside them ,” says Mark Luschini , chief investment strategist at Janney Montgomery Scott , which manages $ 138 billion .
Whether they ’ re looking at growth or value , however , it ’ s incumbent upon advisors to be aware of the potential risks to the rally . In the run-up to record stock highs , investors have mostly shrugged off concerns about inflation , geopolitical issues and domestic politics . That changed this spring , as inflation and war concerns momentarily shook the markets .
“ These are known unknowns ,” says Luschini . “ We know they ’ re out there ; we know they could get worse .”
There are other people in the “ thingscan-indeed-get-worse ” camp . That ’ s where you can put Jamie Dimon , the CEO and chairman of JPMorgan Chase , the nation ’ s biggest bank . In announcing first-quarter results for the bank , Dimon warned that “ a number of significant uncertain forces ,” such as persistent inflation and wars could threaten the economy .
In the run-up to record stock highs , investors have mostly shrugged off concerns about inflation , geopolitical issues and domestic politics .
Indeed , these two issues occasionally arise to scare the dickens out of investors . In April , the Labor Department reported that inflation had risen 3.5 % from the prior year , which was hotter than expected . The market was indeed startled , closing lower on the news . ( The Federal Reserve has a 2 % inflation target , though a growing chorus of economists say the number is unrealistic .) Equities will likely recover , as many strategists think such disappointing data might simply delay the cuts in the federal funds rate that investors are betting on rather than force the feds to do a 360 and raise rates instead to fight inflation .
The Israel-Hamas and Ukraine-Russia wars might be the biggest thing on the minds of Washington politicos , but Wall Street and many strategists have largely taken a see-no-evil approach , regarding them as noise , despite the inflationary pressures caused by the war in Ukraine .
But fears about the conflict in Israel expanding throughout the Middle East exploded into reality when Iran fired drones and missiles into Israel in April in retaliation for Israel striking Iran ’ s Damascus consulate . It won ’ t be just noise to the economy if the U . S . is drawn into either conflict ( beyond just sending weapons and dollars ) or if the cost of a barrel of oil soars beyond its current $ 85 because a war has disrupted global supply .
Market strategists and advisors are mostly divided on the potential market impact of the 2024 election . Some think a win for incumbent Joe Biden would favor growth stocks while value stocks would benefit under Trump .
Jim Thorne , chief market strategist at Wellington-Altus , a wealth advisory firm in Winnipeg , Manitoba , with $ 25 billion in assets , dismisses election concerns as “ noise ” as well . He thinks any U . S . industrial policy that aims to bring manufacturing back to the U . S . would be “ setting the country up for economic prosperity ” and he believes either candidate would continue that policy .
Past is prologue , the saying goes . And Sekera finds justification for his more cautious view of the rally in history . “ Since 2010 , only 14 % of the time has the market traded at a 3 % premium or more ,” he points out . “ So , not very often are we in this kind of valuation territory .”
But some bulls argue that the potential of AI to dramatically transform business and the economy in unforeseen ways also puts the market in a “ unique ” place . The massive investment build for AI infrastructure will keep companies such as Nvidia on a glide path to continued robust earnings and sales for many years , they argue .
“ There are unique times in history where we go through big structural change , and that ’ s where we are now ,” says Thorne , of Wellington-Altus . “ We ’ re talking about developing a brand-new industry .”
Lee and other AI bulls say investors should stay plugged into the tech sector . Robert Hagstrom , chief investment officer at EquityCompass , a Baltimore-based RIA with $ 5 billion in AUM , sees better-than-market earnings growth in the information technology and communication services sectors . Both industries are benefiting from a “ tsunami ” of spending by companies seeking the productivity AI provides , he wrote in a recent note .
Hagstrom , who ’ s written several books Continued on page 59
44 | FINANCIAL ADVISOR MAGAZINE | MAY 2024 WWW . FA-MAG . COM