Question of the week: Is it time to re-frame the rate cut question?
The latest round of U.S. inflation data was a reminder that it could take some time before central bankers feel more comfortable pivoting to interest rate cuts.
Given that traders have been pricing in several cuts this year, that development has raised concerns about a possible pullback in the equity market.
But longtime market watcher Liz Miller told me she’s less concerned about when exactly the pivot takes place.
“We expected this inflation decline to be sticky,” Miller told me in an interview this week.
Her view is that at the end of the day, the economy is in a good enough place to justify stock market gains in the next year.
Here’s some additional perspective that Drew Pettit, an equity strategist at Citi, who shared with us this week:
“I think the floor under the market if we don’t have cuts, but have a good economy and good fundamental backdrop, is a lot higher than people expect. It’s been our view on U.S. equity markets that you don’t necessarily need the Fed to cut to sustain current levels around 5,100. But we do think you do need the Fed to cut to get our bull case of 5,700 to come to fruition.”
Now, to be clear, I’ve heard from several strategists who are betting on a near term pullback, as they are common during bull markets.
But the fact that investors are hanging in and buying is broadening out to more sectors — despite higher inflation readings — is notable.
How MAGNIFICENT are tech valuations?
A JPMorgan strategist made headlines for arguing that the “Magnificent 7” stocks are currently lower relative to the rest of the S&P 500, when compared to their average over the past 5 years.
“The group is currently trading less stretched than a few years ago, given earnings delivery,” Mislav Matejka wrote in a note.
We decided to look at the numbers for ourselves, based on their respective blended forward price to earnings ratios. Here’s what we found, when the five year average of each stock’s valuation was compared to its peers:
Nvidia: well below the average
Microsoft: well above the average
Apple: slightly below the average
Alphabet: slightly above than the average
Meta: well above the average
Amazon: slightly above than the average
Tesla: slightly above than the average
Big stocks with Low Valuations
Building on our analysis of the Magnificent 7, we wanted to dive deeper into this idea of stocks that look reasonable, compared to their earnings growth. We decided to look at companies with markets caps of more than $100 billion that have low PEG ratios. That’s a company’s market value compared to its projected earnings growth. the actual math on this metric is the stock’s price to earnings ratio divided by the growth rate of its earnings. Here are some of the names that made the cut:
Nvidia
Uber
Merck
Bristol-Myers Squibb
Bank of America
Wells Fargo
Progressive
Citigroup
Chevron
Exxon Mobil
UPS
Deere
MetLife
Capital One
DoorDash
Occidental Petroleum
Target
Who are the dividend growers?
One of my guests this week, Wall Street bull John Stoltzfus, talked about his interest in dividend growers — companies that are likely to raise their dividends, as opposed to simply looking at current dividend yields.
Bloomberg has a great function that estimates which companies are more likely than not to raise their dividends and it’s based on a range of factors.
So we pulled some names that are projected to raise their dividends by at least 20% over the next three years.
And remember, this is dividend growth, as opposed to the total size of the payments.
Meta
Veralto
Booking Holdings
Disney
T-Mobile
Extra Space Storage
Blackstone
Delta Air Lines
Waste Connections
Applied Materials
Monolithic Power Systems
Big Call: Eli Lilly shares headed towards $1,000
Bank of America analyst Geoff Meacham thinks one of the world’s hottest stocks has more room to run. Meacham told me in an interview that, along with the big lead Lilly and Novo Nordisk have in the fast growing area of weight loss drugs, that the promise of new markets for its weight-loss shots, coupled with expanded treatments for heart-disease, sleep apnea and liver disease are creating a sizeable sales opportunity.
Which stocks does Bill Gates own?
Over the years, Bill Gates has used some of his Microsoft stock and dividends to diversify his net worth. Some of the stocks in which his holding company has big stakes include:
Republic Services
Deere & Co
EcoLab
Berkshire Hathaway (Buffett is a longtime friend and bridge partner)
AutoNation
Otter Tail
CN Rail
Diageo
Heineken
Stock picks of the week
Victoria Fernandez: Crossmark Global Investments: Deere, Cigna, JP Morgan
David Nelson, Belpointe Asset Management: Amgen
Bryden Teich, Avenue Investment Management: AutoZone, Definity Financial
Liz Miller, President, Summit Place Financial: Hershey, Fortune Brands. Hartford Insurance
Garnet Anderson, Tacita Capital: Enbridge, Boardwalk REIT