Credit Suisse added that technology stocks have a “defensive angle” as well. Defensive stocks typically have consistent earnings and dividends that remain relatively constant in comparison to the rest of the market. “We want exposure to ‘soft’ defensives at a time when non-financial cyclicals (e.g. industrial and consumer cyclicals) are clearly expensive,” the analysts said.
Some of the defensive characteristics of tech stocks include having the lowest levels of debt of any major sector in Europe and being able to withstand wage inflation due to high market capitalizations and “relatively few” employees.
According to the analysts, the cost of tech investment is falling relative to the cost of labor, which has resulted in tech becoming a “substitution” for labor. “Many tech companies facilitate cost-cutting (and the desire for corporates to cut costs rises during a slowdown),” they stated.
Chipmakers Intel, Nvidia, STMicroelectronics, and Texas Instruments are among the companies on its list of outperform-rated semiconductor firms that are “cheap” and have “positive earnings revisions.” Amkor Technology, a manufacturer of semiconductor packaging, and ASML, a Dutch manufacturer of semiconductor equipment, are also on the bank’s list.
Credit Suisse also likes Taiwanese semiconductor firm TSMC, saying it is “five years ahead of its Chinese rivals on advanced technology,” and Samsung, for its 37 percent share of the dynamic random access memory (DRAM) market, which is the main component of many computers.
In addition to listing “cheap” stocks, Credit Suisse named “wealth compounders” — tech companies with high returns that are priced at a discount to CFROI, or cash flow return on investment forecasts — a method of measuring a firm’s returns.
Microsoft, security software firms Synopsys and F5 Networks, semiconductor designer Broadcom, and financial software company Intuit are among the list’s outperformers.
Credit Suisse stated about telecom companies, “We continue to believe that 5G and superfast broadband will become nearly as essential as running water,” and chose Nokia and Ericsson as being “very cheap” relative to the market.
Analysts added that some of China’s tech sector “looks cheap” and advised investors to “wait for earnings revisions to trough.” Credit Suisse selected Alibaba and Tencent as names trading at significantly lower valuations than their U.S. counterparts Facebook, Alphabet, and Amazon.
Is a correction on the way for tech stocks?
Stocks have already been jolted this week by concerns about the Federal Reserve’s decision to reduce bond purchases. Stocks fell again Thursday morning, following a 1.1 percent drop in the S&P500 on Wednesday, the worst performance since July 19. The S&P500 is down more than 1% for the week and nearly 2% from its all-time high.
Concerns about inflation, the Covid-19 delta variant, the Fed’s plan to taper bond purchases, a consumer slowdown, and, most recently, geopolitical risks in the aftermath of the withdrawal of US troops from Afghanistan have been raised by strategists.
The calendar will also soon turn to September, which has historically been the worst month for the stock market. It is also a time when many strategists believe it is better to invest in value and cyclicals rather than growth and large-cap tech.
“What poses a risk for the market is that sentiment levels are high, valuations are high, and it’s been on a tear recently,” said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors. “At the same time, there are numerous potential catalysts that could cause the market to panic.
“If you think about the last week or so, we’ve gotten a worsening narrative on pretty much all fronts, whether you’re looking at geopolitical tensions due to Afghanistan, Covid infection rates, or the rate of growth in the United States,” Suzuki added. “Everything has been progressively negative.”
Given how expensive the market has become, Suzuki believes a 10% correction is possible, but he does not anticipate a major sell-off.
Is it better to melt down or melt up?
Julian Emanuel, BTIG’s head of equities and derivatives strategy, believes the S&P500 will correct to around 4,000. On Wednesday, the S&P500 closed at 4,400, down from its recent high of 4,480.
He also believes this week’s volatility is a foreshadowing of a larger market event.
“We believe the Fed is heavily reliant on data at this point,” he said. “When you put it all together, you have to ask yourself whether there is more or less uncertainty than a week ago.”
He said last week’s unexpected drop in consumer sentiment to its lowest level since 2011 was a warning sign, and data this week has disappointed, including a 1.1 percent drop in retail sales.
“Clearly, between the Fed conversation, the delta variant, and the drop in consumer sentiment, there is more uncertainty in an environment where traditional seasonality becomes a headwind in August, leading into September, which is the weakest month, and then presumptively into a tradeable October low,” Emanuel said.
Emanuel stated that risks are rising ahead of a traditionally more volatile time of year, and the Fed is preparing to take its first steps away from the easing policies used to combat the pandemic’s impact. The Fed’s monthly purchases of $120 billion in Treasury and mortgage securities were intended to increase market liquidity and help keep interest rates low.
Once the Fed begins to reduce its purchases, it will be on the path to eventually raising interest rates. The Fed’s easy monetary policies have been credited with propelling stocks to new highs.
“A correction is expected, but if we are incorrect in our assessment, we could be very wrong,” Emanuel said. What could happen is that the market’s growing wall of fear is met by a “wall of money” that has been pouring into commodities and bonds this year.
“If we’re wrong, we’re not going to be slightly off; we’re going to be completely off,” he said. “Above 4,500 (on the S& 500), we simply believe the market could adopt characteristics reminiscent of late 1999 – an epic emotional chase that completely disregards any risks that, in our opinion, are intensifying.”
If the market surges rather than stalls and sells off, he believes the rally will be fierce and short-lived.
September is the worst month.
However, history suggests that a September surge is unlikely.
Sam Stovall, CFRA’s chief investment strategist, has been expecting a correction, and he believes September is historically the time for one. He notes that since World War II, the S&P500 has been down 0.56 percent on average in a month, and has been negative 55% of the time.
Since World War II, the S&P500 has gained an average of 0.7 percent per month. Apart from September, February is the only other month that has experienced a decrease during that time period.
If it is the first year of a new president’s term, the drop is even worse in September, with an average drop of 0.73 percent in those years. The Nasdaq also performed poorly during a president’s first year in office. In those years, it fell 1.29 percent on average, compared to a 0.43 percent fall in September.
Stovall claims that in years when the S&P500 reached new highs in July and August, such as this year, the index averaged a 0.74 percent decline in September and was higher only 43 percent of the time. So far in August, the S&P500 has set seven new highs.
“Even though I’m sick of hearing myself cry wolf, I believe we’re getting closer to a meaningful digestion of recent gains,” Stovall said. “The S&P500 is 11% below its 200-day moving average and 2% above its 50-day moving average as of Tuesday.”
The S&P500 has repeatedly bounced off its 50-day moving average, as traders and technicians have identified that level as a level of support and one that attracts dip buyers. The 50-day moving average, which is essentially an average of the last 50 closing prices, was at 4,349.
“I would say 5% is going to be a significant decline,” Stovall said in an interview on Wednesday. He added that the S&P has not experienced a 5% decline in 278 days, and that the average time for a 5% decline has been 104 days.
Year to date, the S&P500 is up 17.1 percent.
“Yes, there will be a correction, and yes, it will occur. We just don’t know when,” Stovall explained. “September is a month for window dressing. It’s the end of the quarter for many mutual funds, as well as the end of the year. Many businesses will say, “Let’s get rid of those dogs that I don’t want to show anyone I still own.”
Value, cyclicals overgrowth, and technology.
Now, Emanuel and other strategists believe that cyclicals will outperform value, growth, and technology. According to Emanuel, investing in health care makes sense if investors are concerned about geopolitical uncertainty. He also stated that consumer staples would be appealing because they provide yield and can raise prices during an inflationary period.
Suzuki believes that large-cap growth is at the heart of what he sees as a market bubble, and that investors should avoid those stocks. He claims there are a number of indicators that this bubble is about to burst. They include market liquidity, the amount of leverage used by investors, the amount of new issuance, and market democratization, which refers to the influx of new retail investors buying stocks.
“Given the fundamental backdrop, I’m actually optimistic that the underlying fundamentals for the United States economy and market are strong. According to Suzuki, “a large portion of the markets – a third to 50 percent – is near or at the epicenter of an equity market bubble.”
When the tech bubble burst in 2000, he claimed that small-cap value stocks had gained 40% in the calendar years 2000 and 2001. This compares to a 50% to 60% decline in technology during the same time period.
“If the bubble is on one side of the seesaw, you want to be as far away from that side of the seesaw as possible,” Suzuki explained. “If the bubble is in US large cap growth, you begin to buy less US, less large cap growth, and less growth.”
As a result, he is looking at value and cyclicals, as well as more stocks outside of the United States, including emerging markets excluding China.
Best stocks to invest in according to Vanda Research
According to Vanda Research, retail investors’ daily purchases have dropped to $1.1 billion per day over the last month, down from an average of $1.28 billion per day a month ago.
Seasonality and stretched positioning, according to the firm’s senior strategist Ben Onatibia, are contributing to the decline in retail participation. The performance of retail investors’ favorite stocks, on the other hand, is most likely the “overriding factor.”
“Since July, hypergrowth companies and meme stocks have underperformed the S&P by more than 30%, attracting less and less retail money,” Onatibia explained. “Buying dips in the S&P and Nasdaq while waiting for a better environment for speculative stocks appears to be the plan of attack for most retail investors.”
While some novice investors are losing interest in the market, tried and true retail favorites — prior to the rise of so-called meme stocks — remain popular among the retail crowd.
According to Vanda Research, AMD was the most popular buy among the amateur investing crowd in the last five days, with more than $163 million in net retail purchases.
In the last five days, there were approximately $156.5 million net retail purchases of NIO and nearly $143 million net retail purchases of Apple. In the last five days, retail investors purchased nearly $52 million in Tesla stock.
Vaccine manufacturers Pfizer and Moderna continue to attract retail attention. Retail investors spent approximately $155 million on Pfizer and $76.6 million on Moderna, respectively.
Micron, Sofi Technologies, and Alibaba also made the list, according to Vanda Research.
The only other meme name in the top ten is AMC Entertainment. The meme stock of last week, newly public brokerage Robinhood, is conspicuously absent from the list of top purchases.
How the GDP forecast influence investing in best stocks
Jan Hatzius, chief economist, reduced his forecast for third-quarter GDP growth to 5.5 percent from 9 percent. In a note to clients on Wednesday evening, he stated that consumer spending would be reduced due to health concerns.
“Spending on dining, travel, and some other services is likely to fall in August, though we anticipate a small and brief drop. “Production is still being hampered by supply chain disruptions, particularly in the auto industry, and this is likely to result in less inventory rebuild in Q3,” according to the note.
The delta variant has resulted in an increase in cases across the country, prompting some hospitals in the South to ban elective surgeries and deploy extra beds. Fears of the virus were cited as a motivating factor in last week’s dramatic drop in consumer sentiment.
Nonetheless, this wave of cases may have peaked in some of the hardest hit areas, giving hope that the economic impact will be short-lived.
“Weaker growth in Q3 should imply stronger growth in Q4 and 2022 as virus fears hopefully fade and service sector recovery and inventory rebuild resume, and we have raised our forecasts beyond this quarter,” Goldman said in a note.
Hatzius now forecasts full-year growth of 6% and 4.5 percent in 2021 and 2022, respectively. He had previously predicted 6.4 and 4.4 percent.
Furthermore, Goldman warned that the variant could result in another price increase for products whose supply chains have been severely harmed by the virus.
“We now see additional short-term upside for new cars, consumer electronics, and appliances, and have raised our core PCE inflation forecast to 3.75 percent year on year at the end of 2021,” the note said. “As the prices of these goods and used cars fall next year, we expect core PCE inflation to fall below 2% next summer and end the year at 2%.”
