Investors seek upside in undervalued sectors as US stocks face continued volatility in August
August began with significant turbulence for US stocks, driven by economic concerns, disappointing earnings, and the unwinding of the global yen carry trade, as reported by BNN Bloomberg.
This volatility has led Wall Street to search for parts of the market that may have been unfairly punished. Despite the S&P 500 recovering most of its losses from an initial three percent drop, it remains about six percent below its record high after four consecutive weeks of declines.
As concerns over the macroeconomic and geopolitical landscape persist, analysts recommend that investors adopt defensive positions while exploring opportunities in undervalued sectors.
Rob Conzo, chief executive and managing director at The Wealth Alliance LLC, advises investors to consider rebalancing their portfolios during market pullbacks, using the opportunity to buy into areas that have dropped in value.
However, Quincy Krosby, chief global strategist at LPL Financial LLC, suggests that long-term investors should avoid trading around volatility, emphasizing that it may be wiser to stay invested in portfolios designed for long-term growth and ride out the fluctuations.
Opportunities in the Market
Semiconductors
Semiconductors present an attractive opportunity after recent declines, according to analysts at Citigroup Inc. The Philadelphia Semiconductor Index has fallen roughly 20 percent from its July peak, impacted by macroeconomic pressures, high earnings expectations, and risks related to the automotive market.
Despite these challenges, Citigroup remains bullish on the sector due to continued strength in AI and memory demand. Micron Technology Inc. stands out as Citi’s top pick, with other recommended stocks including Advanced Micro Devices Inc., Broadcom Inc., Analog Devices Inc., Microchip Technology Inc., Nvidia Corp., and KLA Corp.
Health care
The health-care sector has seen increased interest as investors rotate into more defensive areas of the market. The S&P 500 Health Care Index has risen about three percent over the past month, outperforming the broader market, which has declined by more than four percent.
David Harden, chief investment officer at Summit Global Investments, believes that the sector still holds growth potential, particularly in the area of weight-loss drugs.
Eli Lilly & Co., for example, saw its shares surge after the company reported earnings that beat expectations and raised its 2024 revenue forecast, driven by sales of its obesity medication.
Technology
The technology sector, particularly the so-called Magnificent Seven megacaps, has experienced significant declines recently. A Bloomberg index tracking this group is down about 15 percent from its July peak, which has also brought down their price-to-earnings ratios.
Rhys Williams, chief strategist at Wayve Capital Management LLC, suggests that investors who were previously underweight in tech should consider adding to their positions, as these stocks now trade at more attractive valuations.
Yield-sensitive stocks
In times of economic uncertainty, stocks that are sensitive to interest rates, such as utilities, REITs, and dividend-paying companies, become more appealing to investors. The S&P 500 Utilities Index, yielding over three percent, has risen about 16 percent so far this year, outperforming the broader market.
Joe Quinlan, head of CIO Market Strategy for Merrill and Bank of America Private Bank, predicts that real estate stocks may perform well as the Federal Reserve signals potential rate cuts and mortgage rates begin to decline.
Quinlan also emphasizes the importance of holding or acquiring dividend-paying stocks in volatile markets, noting that “high-yielding dividends provide balance within the equity component of your portfolio” and can offer stability during uncertain times.
