INVESTING
Big Tech No Shrinking Violets
A market broadening doesn ’ t mean mega-cap tech stocks will suddenly morph into shrinking violets and cede the spotlight to other sectors . Earnings growth for the seven should remain robust . Ablin notes that “ these companies are able to generate more cash flow in a year than they have debt on their books .”
With many tech stocks commanding 30 times P / E multiples and higher . That level is no home for value mavens like Nygren . But investors like Gates at BlackRock remain confidently plugged into the sector . “ Our team has focused on leaning more into tech-plus and where earnings have the most potential ,” Gates wrote in the June report . “ Right now , we think that techy sectors continue to provide us with an ample earnings engine while we buy others selectively and hunt for tactical opportunities .” He adds that he still expects double-digit earnings growth from the top seven companies over the next 12 months .
Sectors Making Their Move
“ If the market was concerned about a recession on the horizon , it ’ s hard to believe that financials , industrials and materials would be in the leadership post ,” Lundgren says . Financials and industrials are among the top three sectors in his research tracking sector trends and momentum .
The S & P 500 Financials index has returned 33.04 % over the past year as of August 30 , according to S & P Global , and it sells for 20.76 times trailing-12-month earnings . The sector , which includes banks , credit services , insurance and other industries , should benefit from a growing economy and low interest rates , although it still comes burdened by the lingering concerns of the 2008 financial crisis .
That ’ s fine with Lundgren . “ I like it when the consensus view is negative ,” he says . “ I worry when everybody is unanimously enamored with what ’ s leading , like Nvidia .”
Banks are much safer now than they were before the crisis , adds Nygren . The sector , which is tracked by the Financial Select Sector SPDR ETF , should grow earnings 7.5 % this year and 10 % in 2025 , according to New York research firm Trivariate Research .
According to the firm , earnings for industrials , which include waste management , construction and transportation , should also shoot up sharply in 2025 , to 16.3 % from an estimated 5.5 % this
Earnings growth for the Magnificent 7 tech stocks should remain robust . Ablin notes that “ these companies are able to generate more cash flow in a year than they have debt on their books .” year . Industrials , and one of its component industries , materials , should benefit from the expected wave of infrastructure spending .
Furthermore , industrials , along with energy companies , are building the many data centers powering artificial intelligence chips , according to a recent Morningstar report . The S & P industrials index has gained 21.68 % over the past year , but it has underperformed the broader index for the year . So it has room to grow , say bulls . The big ETF tracking the sector , the Industrial Select Sector SPDR , commands a trailing-12-month P / E ratio of 28.23 .
Utilities , which include gas , water and electric , have traditionally been regarded as relatively staid investments , preferred by investors such as retirees who seek income from high-dividend yields and limited downside during economic downturns . But the sector ’ s promising new growth prospects are tied to the glitzy AI build-out , as data centers need electricity to make chips . In an August 5 report that labels utilities as fairly valued , Morningstar expects data center electricity demand to grow 46 % cumulatively by 2032 . “ Data center electricity demand growth is a key source of upside for U . S . utilities that we don ’ t think the market appreciates ,” wrote analysts Travis Miller and Andrew Bischof . Investors recognize this and have bid up the sector by 21.33 % the past year . Trivariate sees earnings growth at a robust 16.6 % this year .
For many investors , nothing focuses the mind — or portfolio — more than a 2 % one-day meltdown in stocks . The August 5 “ violent selloff ,” as Lundgren describes it , reminded investors that the path to higher returns won ’ t be a smooth one , and , as Morningstar noted recently , the market rotation is sparking heightened volatility . Furthermore , markets are historically vulnerable to sudden swoons in September and October . But stocks have recovered quickly since the sharp August drop , and the S & P 500 now stands just 1 % off its all-time highs . Indeed , after a spirited sprint in the heat of summer , stocks evidently were due for a rest . The rally , contend bulls , is now fully refreshed .
46 | FINANCIAL ADVISOR MAGAZINE | OCTOBER 2024 WWW . FA-MAG . COM