We all have Nvidia (NVDA) to thank for the S&P 500 (SPY) finally breaking above 5,000. Truly one of the most impressive earnings announcements in recent years. However, the valuation of NVDA and the rest of the mega-cap tech sector is becoming high, casting doubt on the formation of a bubble. Find out what investment expert Steve Reitmeister thinks about the current state of the market along with his preview of these 12 top stocks to buy now. Continue reading below for more information.
Artificial intelligence is all the rage. And no one is doing it better than Nvidia (NVDA). This was on full display in their extraordinary Wednesday following the market earnings beat that lit a fire under stocks on Thursday… especially all the AI-related tech stocks.
This led to an impressive breakout above 5,000 for the S&P 500 (SPY) which closed the session at 5,087. But investors should be concerned that not all stocks are participating in this rally. For example, are the Russell 2000 small caps still in the red this year???
We will discuss this and more in today’s market commentary.
Comment on the market
February featured an ongoing test of the 5,000 level for the S&P 500.
Twice before shares closed above 5,000 briefly, then fell back below. But there is a feeling that this 3rd time is the charm, with further disruption likely on the way.
Yet, just as in 2023, gains appear too isolated in mega-cap tech stocks, as can be seen from this year’s chart focused on my market cap gains:
With history as our guide, a healthy bull market has small caps at the forefront. That’s because these smaller companies typically have superior growth prospects that push their shares above average.
This is why small cap returns going back 100 years are typically 20% better than large cap returns. For clarity, this means that if large caps have an average return of 10%, small caps would be about 20% better with a 12% return (not 30%).
One theory is to say “the trend is your friendAnd so investors better play the large-cap tech game until the party’s over.
Going back to the late 1990s, it was a great idea as long as you sold in early 2000 at the first signs that the bubble was bursting. Unfortunately, investors rarely make these prudent moves. Instead, they tell themselves seemingly sound logic like selling when stocks return to previous levels. This incorrect thinking leads to disastrous results at the end of the bubble, as stocks can easily drop 50-80% in a fairly short time.
To be clear, I’m not saying Mega Cap or AI stocks are a craze like we saw in 1999 for Internet stocks. Nvidia and others are profitable companies growing at a phenomenal rate. But their PE earnings near 40X are a premium that history indicates has very low odds of future success.
This means that these shares are perfectly priced. They will likely stay high as long as that perfection continues to manifest itself with each subsequent earnings report. But once the first blemish in the earnings outlook shows up, then “Be careful down here!”.
Keep in mind that in my time at Zacks Investment Research we have conducted a number of studies on PE and expected growth rates of companies. Most of them would assume that the higher the expected growth…the higher the returns. Yet the exact opposite occurred, with the highest growth companies offering the lowest future returns.
This is precisely because of the higher PE and price per perfection issue mentioned above. Growth never holds up over time. Whether it’s industry conditions or fierce competition, at some point the growth party ends. And when that happens, stocks implode and PE drops.
My guess is that just about everyone has a stake in these Magnificent 7 stocks to benefit while this AI party lasts. This ownership is either held directly by individual companies or through ownership of SPY or QQQ which is dominated by these stocks.
The question is: what will you do with the rest of your money because it is not wise to have too many eggs in this basket that becomes increasingly fragile?
For me it’s taking advantage of my best investment advantage. This focuses on the proven outperformance of stocks discovered by our POWR rating system.
Analyzing each stock against 118 factors that indicate future outperformance is why coveted A-rated stocks have generated an average return of +28.56% per year since 1999. And this outperformance is showing itself once again in abundance this year.
What are the best POWR-rated stocks I recommend today?
Continue reading below for the answer…
What to do next?
Check out my current 12-stock portfolio filled to the brim with the outperformance advantages found in our unique POWR Ratings model. (Nearly 4 times better than the S&P 500 Index dating back to 1999)
This includes 5 recently added hidden small caps with huge upside potential.
I also have 1 specialty ETF that is incredibly well positioned to outperform the market in the weeks and months ahead.
This is all based on my 43 years of investing experience watching bull markets… bear markets… and everything in between.
If you’re curious to learn more and want to see these 13 hand-picked lucky trades, click the link below to get started right away.
Steve Reitmeister’s Trading Plan and Top Picks >
Wishing you a world of successful investing!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO of StockNews.com and editor of Reitmeister Total Return
On Friday morning, SPY shares traded at $507.66 per share, up $0.16 (+0.03%). Year to date, SPY has gained 6.81%, compared to a % gain in the benchmark S&P 500 index over the same period.
About the author: Steve Reitmeister
Steve is better known to StockNews audiences as “Reity.” He is not only the CEO of the company, but also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Find out more about Reity’s background, along with links to her most recent articles and headline picks.
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