The Citi U.S. Economic Surprise Index is heading straight south, dampening hopes for a broadening of S&P 500 performance leadership. The current trend suggests that even if we’re not in a technology bubble now, we might soon be.
The economic surprise index gauges U.S. economic data releases, weighted by importance, relative to consensus forecasts. The current reading of -45 indicates that the majority of vital data released recently have significantly undershot economist expectations, a potential sign of fading U.S. momentum.
A broadening of market leadership beyond the AI-related technology behemoths like Nvidia Corp., Alphabet and Microsoft Corp. will be, to some degree, a function of stronger economic growth. An accelerating economy means solid earnings growth becomes apparent beyond the megacaps benefitting from secular trends and global revenues.
Significant profit streams become available through smaller, more attractively valued stocks as the economy strengthens. Eventually, investor assets should gravitate away from existing, expensive market leading companies to own stocks representing decent earnings growth trading at more attractive valuations.
Wells Fargo strategist Christopher Harvey added more context to current trends by noting that full-year 2024 earnings expectations for small and midcap stocks have been falling but they are rising, if marginally, for the largest stocks. By sector, profits for technology and communications services are a growing share of total S&P 500 earnings while health care and energy are contributing less.
Mr. Harvey does not see a rotation away from the technology megacaps until U.S. economic growth bottoms out and the Federal Reserve starts cutting interest rates. The winners will keep winning in his estimation, increasing the odds of another 1990s-like tech bubble.
To mitigate risk, Mr. Harvey recommends a barbell approach. On one side, a 60 per cent allocation to communications services stocks that are trading at what he considers reasonable valuations and are enjoying strong price momentum (Alphabet and Meta Platforms are in this sector although not mentioned in the research report by name). On the other side of the barbell, a 10 per cent weighting in utilities and a 30 per cent position in health-care stocks provide downside protection.
-- Scott Barlow, Globe and Mail market strategist
Also see: S&P 500′s tech dominance sparks calls for portfolio diversification
This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.
The Rundown
Interest rate cut prospects could bolster U.S. stocks as investors await earnings, elections
Reuters reports on how the prospect of near-term interest rate cuts is bolstering the case for investors to remain bullish after a run in U.S. stocks that may soon be tested by upcoming corporate earnings reports and growing political uncertainty.
Buy these three ETFs that will help you diversify internationally
Most investors are familiar with, and practice, basic portfolio diversification. That’s the process of distributing your money among the three broad asset categories: equities, fixed income and cash. But it’s important to go beyond that and to apply geographic diversification as well. This is easily done using exchange-traded funds, which offer broad diversification at a low cost. Gordon Pape has these three recommendations.
The best bond ETFs to own right now, as presented by AI and a human
Rob Carrick asked ChatGPT for the best bond funds to invest in right now. Here’s what turned up, plus what he thinks should be added to the list.
Others (for subscribers)
Analysts’ forecast returns, recommendations and yields for all stocks in the S&P/TSX Composite Index
Number Cruncher: Five small-cap stocks ready to outperform
Number Cruncher: Uranium stock valuations with the spot price in a holding pattern
BlackRock bullish on U.K. stocks after elections, Japan stocks are top play
Asia investors wager on region’s rebound, China recovery
Vistra, Constellation Energy shares surge on clean energy demand bets to power AI tech
Wednesday’s Insider Report: CEO is buying this stock yielding 7% that’s up 13% in 2024
Tuesday’s Insider Report: Business mogul Eric Sprott acquires shares in this stock that’s up 61% in 2024
Wednesday’s analyst upgrades and downgrades for July 10, 2024
Tuesday’s analyst upgrades and downgrades for July 9, 2024
Globe Advisor
ETFs with defined outcomes offer downside protection but uptake has been slow
Three ways to identify capital compounders
Beleaguered clean energy funds eye rebound amid interest rate cuts, rising demand
Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis.
What’s up in the days ahead
Click here to see the Globe Investor earnings and economic news calendar.
More Globe Investor coverage
For more Globe Investor stories, follow us on Twitter @globeinvestor
Compiled by Globe Investor Staff