MGV: Why I Like Vanguard's Mega-Cap Value ETF Here

sankai/iStock through Getty Photos Has Nvidia (NVDA), together with the remainder of the “Magnificent 7,” the Nasdaq 100, and the S&P 500, already peaked for the present enterprise cycle? It’s a daring proposition, however actually doable in our view. October 29 of this yr might properly mark that turning level. Nvidia’s money move disappointment relative to analyst expectations in its earnings…

Mega-Cap Tech Nonetheless A Purchase

Cyclical value stocks, including shares of companies in the financials, industrials and basic materials sectors will play a catch-up to outperforming megacap technology shares heading into the third quarter of 2023, broadening the stock-market rally and lifting the benchmark S&P 500 index to 4,400, a closely followed Wall Street analyst forecast on Tuesday. “Most gains since October 2022 were cyclical growth, technology, for example, but now we see cyclical value such as basic materials, industrials, financials in a catch-up price-to-earnings ratio led rally to the third quarter of 2023, which broadens the market while limiting cap-weighted index upside,” said Barry Bannister, chief equity strategist at Stifel, in a Monday note. The cyclical growth category includes software (Microsoft Corp. MSFT, -0.75% -dominated), semiconductors (Nvidia Corp. NVDA, -1.43% -dominated), tech hardware (Apple Inc. AAPL, -0.29% -dominated), retailing (Amazon.com AMZN, +1.01% -dominated), media, autos (Tesla Inc. TSLA, +1.20% -dominated) and apparels, while the cyclical value category includes banks, materials, transportation, real estate, capital goods and insurance, according to Stifel. Most of the stock-market gains so far in 2023 have been powered by a handful of tech-focused names, whose weighting in the S&P 500 SPX, -0.01% is at a historically high level. They have helped lift the index higher by 11.3% this year and had it on the verge of exiting its longest bear-market run since 1948. However, a top-heavy concentration usually indicates limited participation and is not sustainable over the long term.  That’s why a “catch-up” rally in cyclical value stocks could help broaden out the stock-market advance, but it will restrict the future upside for the cap-weighted S&P 500 as companies in the cyclical value category only account for 24% of the index, while the cyclical growth represents a notable 44%, Bannister said. Among the 11 sectors of the S&P 500, the financials sector SP500.40, +1.10% has risen 2% over the past month, while the industrials sector SP500.20, +0.29% has advanced 0.8% and the materials sector has shed 1.5% over the same period. At the other end of the spectrum, the communication services SP500.50, +0.90% and information technology sectors SP500.45, -0.34% have jumped over 10%, thanks to robust gains in megacap growth and tech stocks, according to FactSet data.  Strategists at Stifel divide the 24 industries in the S&P 500 into four quadrants based on economic growth, which affects earnings-per-share, versus inflation, which has affected price-to-earnings ratio since 1990. The chart below shows the cyclical growth stocks have been overbought since the start of 2023 when strategists compared their shares with their 50- and 200-day moving averages. However, stocks in the cyclical value category have been oversold in the same period and are poised to rebound when “global GDP firms, U.S. dollar weakens, and the Federal Reserve officially reaches the end of its interest-rate hiking cycle,” the strategists said.

SOURCE: BLOOMBERG DATA, STIFEL ESTIMATES “Since Oct. 24, 2022, we’ve preferred the cyclical quadrants (at right), seeing no near-term recession and high but cooler inflation,” said Bannister.  However, Bannister is still cautious over the longer term as he sees reasons to watch out for a “textbook” recession in late 2023 and flattening earnings growth by year end. The 50-day moving average of the 3M-10Y Treasury yield curve shows recession risk in September 2023, with “no false signals the past 55 years in 8 recessions,” said Bannister (see chart below).

Cyclical value stocks, including shares of companies in the financials, industrials and basic materials sectors will play a catch-up to outperforming megacap technology shares heading into the third quarter of 2023, broadening the stock-market rally and lifting the benchmark S&P 500 index to 4,400, a closely followed Wall Street analyst forecast on Tuesday. “Most gains since October 2022 were cyclical growth, technology, for example, but now we see cyclical value such as basic materials, industrials, financials in a catch-up price-to-earnings ratio led rally to the third quarter of 2023, which broadens the market while limiting cap-weighted index upside,” said Barry Bannister, chief equity strategist at Stifel, in a Monday note. The cyclical growth category includes software (Microsoft Corp. MSFT, -0.75% -dominated), semiconductors (Nvidia Corp. NVDA, -1.43% -dominated), tech hardware (Apple Inc. AAPL, -0.29% -dominated), retailing (Amazon.com AMZN, +1.01% -dominated), media, autos (Tesla Inc. TSLA, +1.20% -dominated) and apparels, while the cyclical value category includes banks, materials, transportation, real estate, capital goods and insurance, according to Stifel. Most of the stock-market gains so far in 2023 have been powered by a handful of tech-focused names, whose weighting in the S&P 500 SPX, -0.01% is at a historically high level. They have helped lift the index higher by 11.3% this year and had it on the verge of exiting its longest bear-market run since 1948. However, a top-heavy concentration usually indicates limited participation and is not sustainable over the long term.  That’s why a “catch-up” rally in cyclical value stocks could help broaden out the stock-market advance, but it will restrict the future upside for the cap-weighted S&P 500 as companies in the cyclical value category only account for 24% of the index, while the cyclical growth represents a notable 44%, Bannister said. Among the 11 sectors of the S&P 500, the financials sector SP500.40, +1.10% has risen 2% over the past month, while the industrials sector SP500.20, +0.29% has advanced 0.8% and the materials sector has shed 1.5% over the same period. At the other end of the spectrum, the communication services SP500.50, +0.90% and information technology sectors SP500.45, -0.34% have jumped over 10%, thanks to robust gains in megacap growth and tech stocks, according to FactSet data.  Strategists at Stifel divide the 24 industries in the S&P 500 into four quadrants based on economic growth, which affects earnings-per-share, versus inflation, which has affected price-to-earnings ratio since 1990. The chart below shows the cyclical growth stocks have been overbought since the start of 2023 when strategists compared their shares with their 50- and 200-day moving averages. However, stocks in the cyclical value category have been oversold in the same period and are poised to rebound when “global GDP firms, U.S. dollar weakens, and the Federal Reserve officially reaches the end of its interest-rate hiking cycle,” the strategists said.

SOURCE: BLOOMBERG DATA, STIFEL ESTIMATES “Since Oct. 24, 2022, we’ve preferred the cyclical quadrants (at right), seeing no near-term recession and high but cooler inflation,” said Bannister.  However, Bannister is still cautious over the longer term as he sees reasons to watch out for a “textbook” recession in late 2023 and flattening earnings growth by year end. The 50-day moving average of the 3M-10Y Treasury yield curve shows recession risk in September 2023, with “no false signals the past 55 years in 8 recessions,” said Bannister (see chart below).