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Wolfe Research said it foresees investors sticking largely with mega-cap technology stocks as volatility ramps up this summer.
The independent sell-side research firm outlined its view in a Thursday note, highlighting choppier conditions in the stock market (SP500)(COMP:IND)(DJI) over the past week as YTD high-flyers Nvidia (NVDA) and Broadcom (AVGO) have sold off while others major gainers such as Alphabet (GOOG)(GOOGL) and Meta Platforms (META) continue to outperform.
“Our sense is that volatility will continue to pick up over the summer. However, we expect this to generally benefit the Mag 7, secular growers, and the overall Momentum Trade in the weeks ahead,” Wolfe Research said.
Investors are likely to favor the Magnificent 7 stocks – (AAPL) (AMZN) (GOOG) (GOOGL) (META) (MSFT) (NVDA) (TSLA) – or “names they can count on” – as they navigate economic data surprises, it said. Other market experts have also flagged the potential for a volatility (VIX) pickup stemming from uncertainty about the economy, Federal Reserve policy and the upcoming U.S. presidential election.
The Information Technology (SPG1200-45)(XLK) and Communication Services (XLC) sectors are big winners this year on the back of improving earnings outlook and multiple expansion, and as those groups are the most leveraged to the Momentum Trade strategy and Artificial intelligence (AI) themes, it said.
The Information Tech sector has risen +28% YTD and the Communications Services has advanced +27%. The S&P 500 (SP500)(SPY)(IVV) has tacked on 15%.
“[We] expect these themes to continue to benefit from an environment in which growth is slowing but the Fed is expected to kick off a deep cutting cycle. Further, our sense is that the biggest companies driving these trends will once again put up very solid results during 2Q earnings season,” the firm said.
Tech ETFs that investors can monitor include: (SOXX), (SMH), (IYW), (CIBR), and (RSPT).
