Market Movements Indicate Potential Shift from Growth to Value Stocks
In a recent market trend that caught many investors by surprise, a notable shift is emerging between value and growth stocks in the American market. This change is largely driven by the increased likelihood that the Federal Reserve will cut interest rates in September. The probability of a rate cut has surged to 95%, bolstered by the release of a lower-than-expected inflation index – showing the smallest monthly variation in the core index in 41 months.
Trigger for Massive Portfolio Rotation
This unexpected inflation data acted as a catalyst for a significant portfolio rotation in the U.S. stock market. The ripple effect caused a substantial sell-off in technology stocks while triggering a recovery in other economic sectors. The tech-heavy Nasdaq dropped by 2% on Thursday, marking its worst day since April. The decline was led by the major technology companies collectively known as the "Magnificent Seven," which saw a combined market value loss of $598 billion.
In contrast, the Russell 2000 index, which tracks small-cap stocks, surged by 3.6%, its best performance since November. The stark movement in these indices led some market observers to describe the event as a "six-sigma event," suggesting an occurrence that’s exceedingly rare, appearing beyond six standard deviations from the norm and having a 2 in 1 billion probability.
Expert Opinions and Market Reactions
Thiago Kapulskis, a technology analyst at Itaú, highlighted that while value stocks had been lagging, the current market dynamics did not provide substantial reasons for fleeing growth stocks. "Looking at the fundamentals, the results continue to be excellent, and we expect positive revisions. We are predicting a good earnings season," Kapulskis told the Brazil Journal.
Following the sharp correction, the Nasdaq showed a modest recovery, closing up 0.6% the next day. Meanwhile, the Russell continued its upward trend, gaining 1.1% on the day and 6% over the week.
Top Recommendations in Big Tech
Kapulskis detailed his top recommendations in a recent report, focusing on several Big Tech stocks. TSMC and Nvidia topped his list, with a 100% and 90% conviction in their respective investment theses.
"Even though TSMC is trading at a premium compared to its historical 23.6x P/E ratio, it is still a low multiple relative to what we see for high-tech semiconductor companies," he wrote. "We are optimistic about a growth supercycle over the next 18 to 24 months."
Regarding Nvidia, Kapulskis anticipated further upward revisions in sales. "Applying a 30x multiple, it implies that the stock could soon reach $150," representing a potential 15% upside from its current $130 price point.
Apple also secured a notable position in Kapulskis’ list, anticipating upward revisions from Wall Street analysts, and carrying an 80% conviction in the stock. The list of preferred sectors is rounded out by Meta and Amazon, each with a 60% conviction. Meta is described as "cheap" with a 19x multiple, and Amazon is recognized for its solid performance and improving sales margins.
Conclusion
The market’s recent movements signal a potential shift from growth to value stocks, influenced by expectations of Federal Reserve rate cuts and lower inflation data. While major tech stocks faced a sell-off, small caps showed significant recovery. Experts like Thiago Kapulskis remain optimistic about the fundamentals of leading tech companies and foresee positive revisions and growth in the near future.
For more information, visit Itaú’s official website.
