These 3 overlooked sectors of the stock market have ‘spring-loaded’ upside potential, says JPMorgan

iStock; Rebecca Zisser/BI

  • There is unrealized upside potential in three underbought sectors of the stock market, according to JPMorgan Asset Management.

  • These include the semiconductor, rail and parcel shipping, and home improvement sectors, the firm said.

  • These additions could be excellent portfolio additions as AI stocks’ earnings growth begins to slow, strategists said.

Investors are still overwhelmed by the frenzy for generative AI — but there are underappreciated areas of the market that could offer gains like “coil springs,” according to JPMorgan Asset Management.

While the The Magnificent Seven actions — which include tech giants like Nvidia, MetaAnd Microsoft — posted 50% annualized growth in earnings per share in the first quarter, with the rest of the S&P 500 expected to catch up.

By the fourth quarter of 2024, JPMorgan expects earnings growth for the other 493 stocks in the S&P 500 to match that of the Magnificent 7, a dynamic illustrated in the chart below.

Earnings growth is expected to increase across the S&P 500, with the exception of the Magnificent Seven stocks.JPMorgan Asset Management

“Looking ahead, significant fiscal spending, particularly on infrastructure (such as the Inflation Reduction Act and the CHIPS and Science Act), coupled with growing enthusiasm for generative artificial intelligence, should provide a favorable backdrop for stronger secular growth going forward,” the strategists said. “Markets do not appear to have fully priced in this prognosis, as evidenced by the narrow (and narrowing) nature of the stock market rally.”

Investors looking for unrealized upside potential would be wise to seek out non-Mag 7 stocks with “depressed” valuations that have not yet factored in the earnings growth catch-up.

“These names could therefore function as ‘coil springs’,” the note adds, highlighting three particular industries:

Semiconductors. JPMorgan says there are plenty of opportunities in semiconductors outside of the AI ​​sector.

“Struggling sectors such as personal electronics, communications and enterprise could soon rebound as demand is reinvigorated from the low levels left by pandemic-related ‘over-ordering,’” the company wrote.

Rail and parcelsThese stocks are expected to rise due to the “unexpected resilience” of the U.S. economy and the growing need for material transportation. Automation in manufacturing is also expected to increase efficiency, which could drive the rally.

Home improvementAmericans have put home renovations on hold, hampered by high interest rates and the fact that many have already renovated their homes during the pandemic. But that trend is likely to reverse in the future, strategists say.

“As the average age of homes in the United States increases, the likelihood of significant maintenance expenses increases. Additionally, labor backlogs on older projects are being resolved as immigration has helped address labor shortages,” they said.

JPMorgan’s suggestions are indicative of Wall Street’s shift toward recommendation diversificationrather than continuing to chase Mag 7’s gains. This has been the case since…

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