policy , and the value category is beginning to nudge growth off center stage as investors gravitate to laggards with sound fundamentals , including strong balance sheets and cash-generating power .
“ A bull case for the markets is [ if ] the Fed lowers interest rates , engineers a soft landing so we avoid a recession and then we start on a new economic recovery path and small caps lead the way higher ,” says Ablin , whose Chicago-based RIA manages more than $ 50 billion in assets .
Market strategists disagree on exactly when the broadening of the market , or sector rotation , began — some think as early as March of this year or late 2023 — but it ’ s necessary , most say , to keep the rally going , especially as worries about geopolitical concerns replace fears of a recession as the main risks to equities . A broader portfolio would meanwhile buffer investors against the expected volatility of an election-year market .
“ If the market was to go higher today led by mega-caps , again , it would be a bubble of epic proportions because that means that Nvidia has to go higher than 40 times sales , which is where it ’ s already at ,” says David Lundgren , chief market strategist and portfolio manager at Little Harbor Advisors , an advisory firm in Marblehead , Mass .
Lundgren , who views the market mostly through a technical lens , thinks the beginning of a “ correction ” or rotation began in March . More recently , many largecap tech stocks have suffered declines , as investors have started to question whether the payback from massive capex spending on artificial intelligence is going to take longer than enthusiasts had hoped .
“ For the last couple of months there has been a leadership rotation , mostly within cyclical sectors ,” Lundgren adds . “ That ’ s healthy . It kind of resets the leadership clock and it perpetuates the bull market .”
Stocks Soaring To Multiple Highs
The current rally that began October 2022 shows little signs of slowing down . The market-capitalization weighted S & P has risen around 26 % over the past year . The seven mega-techs , living up to their name , tripled the broader market by returning more than 75 %. The Dow Jones Industrial Average , which tracks 30 blue-chip stocks , and the tech-heavy Nasdaq Composite have also hit highs this year .
Wall Street analysts ’ 2024 predictions for the index range from 4,200 to 5,500 . One of the top bulls is economist Ed Yardeni , who , in a recent market note , said his base case puts the S & P 500 at 5,800 by the end of the year and 6,300 in 2025 . “ A robust jobs market , rising real wages , increased productivity and record corporate profits and cash flow suggest the bull market has room to run ,” Yardeni wrote .
Some think the Magnificent 7 and other tech companies deserve their valuation because they are remarkable earnings juggernauts . Since January 2023 , most shares of those seven stocks are up more than 50 %, and , with the exception of Meta and Alphabet , are selling for multiples far above 22 . In the second quarter , BlackRock noted that the largest six tech companies reported a 40 % uptick in year-over-year second-quarter earnings , versus the 8.6 % for the equal-weighted cel of an ongoing secular bull market , do we need a rotation in leadership ?” he asks .
Create A Profitable Rotation Playbook
What should investors and advisors look for if they want to play a broadening in the market ? In a word : “ quality .”
Ablin says he ’ s seeking value across almost all asset classes and sectors . “ We ’ re taking a somewhat cautious view . We want the average stock in large cap but then we also like small caps . But what we ’ re sticking with is quality .”
Broadly that means companies with strong balance sheets , in cyclical sectors , generating robust cash , selling at attractive valuations and tending to flourish in a lowrate environment amid a growing economy . Furthermore , whether it ’ s necessary or not , a market broadening spurs investors to diversify their portfolio in a market perhaps too reliant on a tight concentration of mostly high-priced tech stocks .
“ We think investors who are heavily weighted to the S & P 500 need to think about ways that they might reduce risk ,” says noted value investor Bill Nygren , chief investment officer for the U . S . and
“ We think investors who are heavily weighted to the S & P 500 need to think about ways that they might reduce risk .”
— Bill Nygren , Oakmark category , which avoids concentration .
“ We don ’ t think that a market-wide broadening is a necessary occurrence insofar as earnings remain concentrated in certain sectors — the market chasing after fundamentals means that it ’ s doing its job !” wrote Michael Gates , head of Model Portfolio Solutions in the Americas for BlackRock ’ s Multi-Asset Strategies & Solutions group , in a June report .
Little Harbor ’ s Lundgren notes that it doesn ’ t require a broadening of the market or sector rotation to remain at his year-end price target of 5,500 or 5,600 . He says lower interest rates and positive corporate earnings would be enough to lift stocks higher . “ If this is just part and par- portfolio manager at Oakmark . “ And the nice thing is , I think you can reduce risk and simultaneously increase your return potential because the rest of the market is so much cheaper .”
Nygren , who invests with a five- to seven-year investment horizon , points out that many “ average or normal ” companies in the consumer durable , banking and energy sectors are fetching singledigit P / E multiples and provide a good hedge against inflation as they generate cash to buy back stock .
Looking over that horizon , Nygren thinks investors can expect “ upper-singledigit ” returns . “ We don ’ t think [ the recent double-digit return ] is sustainable ,” he says .
OCTOBER 2024 | FINANCIAL ADVISOR MAGAZINE | 45