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Key for Cedears: after the fall of Nvidia and the S&P500 records, is portfolio rotation beginning on Wall Street?

Key for Cedears: after the fall of Nvidia and the S&P500 records, is portfolio rotation beginning on Wall Street?
Key for Cedears: after the fall of Nvidia and the S&P500 records, is portfolio rotation beginning on Wall Street?

For some analysts, the benchmark index Wall Street, the S&P 500appears to have peaked after reaching last week the 5,500 points. And this index noted 31 all-time closing highsso it is possible that it had already achieved most of the profits expected for the current year, in tandem with the growing nervousness among investors regarding the high valuations of the stock market.

This perspective was exposed in the most recent survey of Bloomberg Markets Live Pulse (MLIV), which revealed that the rebound in North American equity in 2024 has left this type of asset more overvalued compared to US credit or gold, according to the majority of the 586 respondents. At the same time, the Dow Jones seems to be finding its balance in the midst of this shift from technology to “value” stocks, which reinforces the idea of ​​an extension of profits to other sectors.

The background: the dotcom bubble

It just so happens that at the peak of the internet bubble in the early 2000s, The S&P 500 surpassed the Dow Jones Industrial Average by an even greater amount than today. And, during the last six months, the Dow lagged behind the S&P 500 by approximately 12 percentage points. While the average differential of the last 10 years in six-month periods is just nine tenths of a percentage point.

SPY vs. Dow comparison chart.png

Comparative graph of the performance of the S&P 500 and the Dow Jones throughout 2024. In yellow the DJI and in red the SPY.

This alternation in market leadership between the Dow and the S&P 500 It implies that at some point, in the coming months or perhaps years, the industrial index could be ahead of the S&P 500 to the same extent that it is behind it now. According to data from Barronsthe six-month spread record was recorded on March 8, 2000, when the S&P 500 led the Dow by 13.7 percentage points. The Nasdaq Composite reached its Internet bubble peak two days later and we all know well what happened then.

Fortunately, that experience was atypical. However, one can glean something about the likely relative performance in the coming months of value and growth stocks. That’s because the S&P 500 is closer to the growth end of the value-growth spectrum compared to the Dow. Since market leadership has historically oscillated between these two indexes, a broad S&P 500 lead is often followed by the opposite.

Wall Street: Time to abandon tech stocks?

And as the investment advisor explains, Gaston Lentini in chat with Ambit, we are at a “very interesting” point in history. Since he S&P 500 is at historic highs, “driven mainly by technology“that look overrated.

However, an expected rate cut in September or October in the United States should push the market even higher, so if this scenario occurs “The most experienced investors can continue on this train where the locomotive is the four or five largest technology companies in the world.“, says Lentini.

And as of last Friday afternoon, around 125 of the S&P 500 companies were outperforming the index so far this year, which means that the breadth of the rally is not notable, but it is not all that discouraging, either. as Lentini maintains. In other words, The strong rise is not accompanied by great euphoria on the part of analysts. This is because it is an advance strongly led by large-cap technology companies, but there are also other stocks from different sectors and lower market capitalization levels that are also contributing, and this should not be ignored.

A possible S&P 500 pullback in sight

Pedro Moreyradirector at Guardian Capital, He suggests that “the S&P 500 is in a zone to monitor, with its current ceiling at 5,500.” It is from this zone that a pullback could begin, and This correction would be a new buying opportunity, adds the strategist.

However, the analyst, in line with what was stated above, maintains that currently, “The S&P 500 indices and their respective ETFs contain a heavy weighting in technology and companies focused on artificial intelligence”, such as Nvidia. It is important to highlight the latter, because investors are likely to start “suffer from artificial intelligence fatigue“and this strong weighting of the sector in the indices, he adds.

A defensive strategy

Rafael Di Giorno, director of Proficio Investmentanalyzes that at the current level of valuations, the S&P 500 is trading at 24x earnings and 21x expected earnings,”which looks relatively expensive if we look at historical averages“. Due to the above, added to data that points to a slowdown in the US economy within the framework of the “higher for longer”, the broker’s position is “caution regarding the index“.

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New York Stock Exchange

On the other hand, Di Giorno maintains that, although the Dow Jones It usually plays a more defensive role, in the event of a further cooling of the economy it will not benefit. This changes in the event of a “a correction led by the technology sector”because with a healthy economy, the strategist sees “value in rotating towards more defensive indices, or diversifying towards other assets such as UnitedHealth Group Inc. (UNH) or the consumer sector, in line with what was proposed with the other strategists.

Cedears: portfolio rotation, which ones does the market recommend?

As mentioned above, there are several stocks outside of the technology area that have also risen impressively in 2024, such as Eli Lilly (LLY), General Electric (GE), General Motors (GM), Modern (MRNA), Walmart (WMT), Costco (COST) and Progressive (PGR). In fact, these stocks have more than doubled the performance of the S&P500 so far this year. They are less influential not because of their price action, but because their respective market caps are smaller. A fact to follow closely.

Lentini recommends in that sense, and “being much more conservative“Companies like Johnson & Johnson (JNJ) and McDonald’s (MCD) are “solid companies that seem outdated and even boring to some,” says Lentini. However, he notes that if you’re looking to avoid buying companies with stocks that appear expensive, these are good safe haven alternatives.

Meanwhile, Moreyra comments that in a rotation or diversification scenario, “the best options are value-type actions”, that is, mature and consolidated companies in the marketsuch as Coca-Cola (KO), JPMorgan Chase (JPM), Visa (V) and Goldman Sachs (GS).

Finally, Lentini adds that turning towards more consolidated companies, although they may seem boring, offers the possibility of “speculate“with the technology giants having a correction and “at that time rotating the portfolio again, selling companies in boring quotes and buying a greater proportion of technology companies that have corrected.”

Source: Ambito

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