Is a correction on the way?
“Too many inexperienced investors are plowing into technology ideas that appear overpriced at 20x revenues, complaining that the often older investment community does not understand the disruption taking place and is too hampered by traditional metrics,” the firm wrote in a client note.
According to analysts led by Tobias Levkovich, the action is reminiscent of the 1999-2000 period, when “panic/euphoria was this ebullient for months before cracks emerged and indices fell.”
In light of this, the firm believes a 10% correction is “very plausible.” A drop of this magnitude would bring the S&P500 to around 4,000, the firm’s year-end target for the benchmark index. On Tuesday, the S&P500 reached a new high of 4,423.15 points.
An unfavorable outlook
On Wednesday, Citi reduced its outlook for the US stock market to neutral. Rising interest rates, according to the firm, will have a negative impact on growth stocks in the coming months. Given the importance of technology stocks to the US stock market, any weakness could weigh on equities in general.
Having said that, Levkovich was quick to point out that he does not believe the S&P500 is in a bubble, as it was in 2000.
“Equities have been held up significantly this year by strong earnings growth. Another distinguishing feature has been central bank support, with comments about eventual tapering having little, if any, negative impact,” he wrote.
According to Refinitiv data, 88 percent of the 340 S&P components that have reported second-quarter earnings have surpassed earnings estimates. In terms of revenue, 87 percent have outperformed expectations.
According to Citi, technology companies’ earnings have been strong in part because of their easy scalability, while cyclical names have benefited from favorable year-over-year comparisons and cost-cutting measures.
“Consumers have wage growth and stimulus money to spend, and corporations have increased capex due to low financing rates,” according to the firm.
Looking ahead, Levkovich identified several factors that could put pressure on stocks. “We are concerned about higher taxes, cost pressures eroding profitability, tapering, and more persistent inflation all converging in September,” he said, noting that the month is traditionally difficult for the S&P500.
“Sentiment is still very strong… and our lead profit margin indicator is still warning us to be cautious.”
Citi’s S&P target for the end of the year is at the low end of analyst expectations. According to data, the average target is 4,316. Bank of America is the most bearish, with a call at 3,800, while Oppenheimer is the most bullish, with a call at 4,700.
Dividend payouts hit a record
A dividend is a payment made to shareholders from a company’s profits. Dividend-paying stocks and ETFs provide investors with regular payments.
“The current working view for S&P500 dividends continued to improve (aided by Fed approval for higher dividends in the second half), as COVID-19 vaccine availability was plentiful (with concern over those who refused to be vaccinated), allowing a wider reopening of America,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
Following the Fed stress test, major banks such as JPMorgan Chase, Bank of America, and Goldman Sachs increased their dividends for the third quarter. Morgan Stanley increased its dividend by doubling it.
According to Silverblatt’s analysis, cash dividend payments increased 10.6 percent year on year in July. According to Silverblatt, the median dividend increase in July was 11.1 percent, up from 8.3 percent last month and 6.3 percent in July 2020.
“Dividends were up for the month, as banks implemented Fed-approved increases. “The actual payment in Q3 2021 appears to be a potential record,” Silverblatt said.
If vaccinations continue and the economy recovers, Silverblatt expects dividend payments to rise by 5% in 2021, setting a new annual record.
ETFs that pay dividends
According to ETF.com, the top five dividend ETFs in terms of assets under management are as follows.
With $61.76 billion in assets under management, the Vanguard Dividend Appreciation ETF is the most liquid. This year, the fund is up 12.83 percent.
The High Dividend Yield fund, another Vanguard ETF, comes in second place with $37.83 billion. In 2021, the ETF has gained 14.9 percent.
With $26.61 billion in assets under management, the Schwab U.S. Dividend Equity ETF finished third. This year, the fund has gained 18.5 percent.
The list is completed by the SPDR S&P Dividend ETF and the iShares Core Dividend Growth ETF.
Dividend stocks that are popular on Wall Street
Analysts examined Vanguard Dividend Appreciation ETF members and identified names with an average 12-month target price that is at least 10% higher than the stock’s closing price on Monday. We found shares that at least 70% of Wall Street analysts recommend buying from that pool.Big names in technology, health care, and finance, such as Microsoft, UnitedHealth Group, and BlackRock, appear on the screen.
Assurant is the most popular stock on the screen, with 87.5 percent of analysts recommending it as a buy. The average Wall Street analyst believes the insurance company’s stock will rise 21.3 percent in the next year.
Ameriprise Financial has outperformed the other companies on the list in terms of 2021 performance. The financial services company’s stock has risen 33% this year, and analysts believe it can rise another 11.5 percent in the next 12 months.
Activision Blizzard has the most implied upside of the stocks on the screen. Activision Blizzard’s stock has been declining recently as the company faces a lawsuit alleging a workplace culture of discrimination and harassment.
Microchip Technology, Applied Industrial Technologies, and Horizon Bancorp are also popular dividend stocks on Wall Street.
Is Robinhood a meme stock?
Robinhood, which struggled to gain traction in its initial public offering last week, surged nearly 80% to as high as $85 per share on Wednesday. The stock was halted several times and has since traded far below its highs. On Tuesday, the stock increased by more than 24%. They fell 8% on their first day of trading last Thursday, after the IPO was priced at $38.
“A group of people, wise men, were convinced that this company was imploding. They were already shorting it. When a new stock is released, it cannot be shorted. They really misjudged Vlad,” Cramer said on “Squawk Box” before the opening bell on Wall Street, when Robinhood was up sharply in premarket trading.
Cramer described Robinhood co-founder and CEO Vlad Tenev as a “loved figure,” adding, “They are convinced, again, these are hedge funds, that this is a house of cards.”
“People who are already short it will be crushed,” the “Mad Money” host predicted. “It happens all the time that people get on the wrong side of the trade. Someone is on the wrong side of this transaction.”
Cathie Wood, the CEO of ARK Invest and a frequent contributor to internet forums such as Reddit’s WallStreetBets, recently purchased more than 89,600 shares of Robinhood for her ARK Fintech Innovation exchange-traded fund. This purchase adds to Wood’s previous purchases of 3.15 million Robinhood shares since the company’s IPO last week.
Robinhood reserved roughly a quarter of its IPO shares for its own customers.
“I salute them for making money,” Cramer said, for believing in the product they use to trade enough to purchase the stock. “I’m overjoyed that people bought it. That’s right. And had faith in the system. But if this is the system’s supercharged version, that is incorrect.”
Robinhood went public last week in a much-anticipated IPO, but not without controversy. During the heady GameStop trading days earlier this year, the company ran afoul of regulators and enraged its own customers.