Tech giants look cheap on an earnings-growth basis, while U.S. stocks overall can resist seasonal weakness
Three weeks into the dreaded September-October stretch when U.S. stocks often tumble, there hasn't been much of a pullback. At least, not yet.
Or likely, not at all. Any market weakness that does develop is a buying opportunity, and here are several reasons why:
1. Investor sentiment is bullish, but not overly so: Since the stock market fools most of the people most of the time, we'd need to see excessive investor bullishness to set the market up for a sharp pullback. But that is not the case.
I follow about a dozen sentiment indicators, but if you track just one, make it the Investors Intelligence Bull/Bear ratio. This one runs on a scale of 0.5 to five. Anything above four is a warning sign of excessive bullishness for me. The most recent reading, on Sept. 11, came in at 1.92. For me, any measure below two suggests that the market is buyable since sentiment is weak (in the contrarian sense).
Another closely watched measure, Bank of America's Sell Side Indicator, tracks the suggested stock allocation among sell-side strategists and most recently it's in neutral territory. It latest reading, at 56.2% equities, suggests a return of 11.5% for the S&P 500 SPX over the next 12 months, says B of A strategist Savita Subramanian. Meanwhile, the survey shows that fund managers are cautious. They've been selling economically sensitive sectors, such as energy, materials and consumer discretionary, which do well when the economy is strong.
2. Recession is unlikely: The U.S. economy is not going into recession anytime soon. The rising unemployment rate is a false signal. The unemployment rate is the number of people working, as a percentage of the labor force. By definition, it goes up when more unemployed people (defined as anyone actively looking for work) join the labor force even as the job market remains healthy.
That's what's happening now. Companies continue to add to payrolls. But unemployment has been going up because the labor force is growing faster than job creation, notes Jim Paulsen, who publishes strategy commentary at Paulsen Perspective on Substack.
Read: This unemployment measure you've never heard of is flashing a recession warning
3. Consumer spending is strong: Goldman Sachs economist Jan Hatzius tracks executive sentiment towards the consumer in earnings calls. In the second quarter his system put consumer sentiment at its highest level since 2022. He expects "robust" 2.4% consumer spending growth in the second half of 2024.
4. Stocks hold up better in September and October when conditions are right: Two stocks that look attractive in this environment are Nvidia (NVDA) and Alphabet (GOOGL). These stocks even look cheap according to a price earnings to growth (PEG) ratio that famed investor Peter Lynch popularized. This measure weighs a stock's forward PE against its long-term earnings growth estimate. For growth stocks, a PEG ratio below 1.5 signifies cheapness. Nvidia has a PEG ratio of 0.66; Alphabet trades at a PEG ratio of 0.92.
Helping the broader market in September and October this year is that U.S. stocks do much better in these two months when interest rates are falling and the monetary supply is growing, Paulsen says. Stocks also fare better in September during election years, when the U.S. stock market performs no worse than average. Paulsen's chart below shows the performance difference:
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned NVDA and GOOGL. Brush has suggested NVDA and GOOGL in his stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks
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-Michael Brush
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