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JPMorgan Asset Management says there are unrealized gains in three underbought areas of the stock market.
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These sectors include semiconductors, rail and parcels, and home improvement, according to the company.
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These investments could be great additions to a portfolio as earnings growth in AI stocks begins to slow, strategists said.
Investors are still in a frenzy over generative AI — but there are undervalued areas of the market that could offer gains like “coil springs.” According to JPMorgan Asset Management.
While the seven greats Stocks – which include tech giants like Nvidia, MetaAnd Microsoft Apple saw 50% year-over-year earnings per share growth in the first quarter, and the rest of the S&P 500 is expected to follow suit.
By the fourth quarter of 2024, JPMorgan expects earnings growth for another 493 S&P 500 stocks to match the earnings growth of the seven largest companies, a dynamic illustrated in the chart below.
“Looking longer term, significant fiscal spending, particularly on infrastructure (such as the Inflation Reduction Act, CHIPS, and Science), coupled with growing enthusiasm for generative AI, should provide a favorable backdrop for stronger secular growth in the future,” the strategists said. “Markets do not appear to have fully priced this forecast in, as reflected in the narrow (and narrow) nature of the stock market rally.”
Investors looking for unrealized gains would be better off looking for stocks outside the MAG 7 index, which have “low” valuations and do not yet take into account catching up to earnings growth.
“Thus, these names can act like ‘coiled springs,’” the note added, highlighting three particular industries:
SemiconductorsJPMorgan Chase says there are plenty of opportunities in semi-financial markets outside of AI trading.
“Declines in areas such as personal electronics, communications and enterprise could soon rebound as demand recovers from the lows left by the ‘over-demand’ of the pandemic,” the company wrote.
Railways and parcelsThese stocks are expected to rise due to the “unexpected resilience” of the U.S. economy and the increased need to move materials. Automation in industry is also expected to increase efficiency, which could fuel the rally.
Home ImprovementAmericans have put home renovations on hold, due to rising interest rates and the fact that many have already renovated their homes during the pandemic. But strategists said the trend is likely to reverse in the future.
“As the average age of homes in the United States increases, the potential for significant maintenance spending increases. Moreover, labor backlogs in older projects are beginning to clear, as immigration has helped solve the labor shortage,” they said.
JPMorgan’s proposals signal Wall Street shift toward recommendation diversificationInstead of continuing to chase the Mag 7 gains. This was the case as uncertainty continued around election And cut federal interest rates next year. Defense investmentsAI stocks, such as energy and utilities, have seen huge gains over the past year, with returns outpacing even top AI picks like Nvidia.
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