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JPMorgan Asset Management says three underperforming areas of the stock market have untapped upside potential.
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Those include the semiconductor, rail and parcel and home improvement sectors, according to the company.
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Strategists said these could be great additions to a portfolio as earnings growth in AI stocks starts to slow.
While investors remain overwhelmed by enthusiasm for generative AI, JPMorgan Asset Management says there are underappreciated sectors of the market that could deliver “coiled spring” benefits.
The Magnificent Seven stocks, which include tech giants such as Nvidia, Meta and Microsoft, grew their earnings per share at an annualized rate of 50% in the first quarter, and the rest of the S&P 500 is expected to follow suit.
JPMorgan expects the earnings growth of the other 493 stocks in the S&P 500 index to match that of the Magnificent Seven by the fourth quarter of 2024, as shown in the chart below.
“Looking longer term, large fiscal spending, particularly on infrastructure (e.g., the Control Inflation Act and the CHIPS/Science Act), combined with growing interest in artificial intelligence generation, should provide a accommodative backdrop for stronger secular growth going forward,” the strategists said. “Markets do not appear to have fully priced this outlook, as reflected in the narrow (and narrowing) stock market rally.”
Investors looking for unrealized upside would be well served to look outside of the Mag 7 for stocks with “depressed” valuations that have not yet priced in catch-up earnings growth.
“These names may therefore act like a ‘coiled spring,'” the memo said, highlighting three industries in particular:
semiconductorJPMorgan said there are many opportunities in semiconductors beyond AI deals.
“Slumping sectors such as personal electronics, communications and enterprise may soon recover as demand, which had been sluggish due to the pandemic-induced ‘over-ordering’, picks up steam again,” the company wrote.
Rail and parcelThese stocks are expected to rally due to the “unexpected resilience” of the U.S. economy and increased demand for material transportation. Automation in the industry is also expected to increase efficiency, which could also support the rally.
Home ImprovementsAmericans are pausing home improvements, hindered by high interest rates and the fact that many people have already made improvements during the pandemic, but that trend is likely to reverse in the future, strategists say.
“As the average age of U.S. homes increases, the potential for significant maintenance costs increases. Moreover, labor-related delays on older projects are being eliminated as immigration helps address labor shortages,” the researchers said.
JPMorgan’s proposal signals Wall Street’s continued shift away from chasing World War 7 profits and toward encouraging diversification as uncertainty swirls around the election and Fed interest rate cuts over the coming year. Some defensive investments, such as energy and utilities stocks, have posted big gains over the past year, even outperforming top AI stocks like NVIDIA.
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