Big Tech Is Expensive. Consider Buying These Value Stocks Instead.

But investors might want to remain cautious, and, in particular, look outside of tech to capture future market gains.

Stifel
Chief Equity Strategist Barry Bannister warns the S&P 500 will likely struggle to make much headway for the rest of 2024’s first half. And although big tech has posted an impressive increase in profits—just look at last week’s megacap winners, like
Amazon.com
—Bannister says investors are currently paying too much for that growth.

“Current market overvaluation is concentrated in large-cap growth stocks which have driven the S&P 500 valuation to levels above what we believe is justified,” he writes.

He sees potential threats to the rally, noting that tech stocks’ big gains can’t continue indefinitely (as investors learned during the dot-com bubble a quarter-century ago). And if inflation remains elevated, interest rates could stay higher for longer—that would be another thorn in tech’s side, as higher rates devalue the sector’s future earnings.

The good news, however, is investors don’t have to rely just on tech and its so-called Magnificent Seven stocks, which include
Meta Platforms,
Apple, Amazon, and other megacap gainers.

Bannister says it might be time to get in to cyclical value stocks—financials, industrials, materials, real estate, and energy—as these sectors look oversold, a position he has held before. These sectors “largely discount a recession that we believe is unlikely to occur, thus providing a timely entry point for Cyclical Value” stocks, he writes.

Better economic growth and an eventual bottoming in inflation should bolster cyclical value stocks over growth stocks, he writes. That should also support better breadth within the stock market—meaning when more stocks are rising, rather than just a few megacap components driving the bulk of the market’s gains.

The winners could include companies that are particularly sensitive to economic growth, like financials:
Visa,

Mastercard,

Wells Fargo,
and
Fiserv
are among the largest companies in this sector that Stifel analysts endorse.

Other sectors like energy and industrials are more sensitive to inflation, and could climb as it continues to ease. Here, Stifel analysts like
Boeing,

CSX,

Schlumberger,

EOG Resources,
and
FedEx.

Bannister isn’t the only one concerned about finding reasonably priced stocks in the current environment. As
J.P. Morgan
highlighted last week, there’s no denying that equity markets are in “expensive valuation territory.”

So it’s little wonder that investors looking for bargains are looking beyond tech. Other strategists assert that 2024 might finally be small-cap stocks’ time to shine.

“Our view is that small-caps can overcome recent headwinds, and we expect them to outperform the broader market both in our base case for a soft landing, and even more so in the event of a ‘Goldilocks’ scenario,” writes Solita Marcelli, UBS Global Wealth Management’s Chief Investment Officer of the Americas, in a note Tuesday.

If nothing else, last week’s brief post-earnings selloff in tech—before upbeat results from Amazon and Meta saved the day—shows the sector has some vulnerabilities, and investors might not stick with it through thick and thin. If tech hits another rough patch, cheaper options may start to look even more attractive.

Write to Teresa Rivas at [email protected]