US Equities (^GSPC, ^DJI, ^IXIC) have moved below historic highs ahead of the Friday release of Personal Consumption Expenditures (PCE) Index data. Annex Wealth Management Chief Economist Brian Jacobsen joins The Morning Brief to discuss the FOMO-driven "meme stock" rally, when to invest and divest from market bubbles, and key sectors to watch.
Jacobsen highlights several areas of the market ripe for investing: "Utilities, perhaps, if we get a little bit of stability with rates and they begin to drift lower, that could benefit utilities. But then as far as industrials and materials, those are much more cyclically oriented. And if we get manufacturing beginning to emerge from this long hibernation that it's been in, we think that's an area that's really poised to outperform for the next not just six months but perhaps even a longer period of time if you look out maybe three years."
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SEANA SMITH: Talk to us just about some of the action that we've been seeing in the market this week, and I want to start with the meme mania, the frenzy that we are seeing around just a handful of names. Does that signal anything worrisome to you just in terms of some of that froth that we could be seeing in the market?
BRIAN JACOBSEN: Yeah. Thank you for having me. And, yeah, that's something that we've really been watching. It is somewhat reminiscent at a much smaller scale about the meme mania during COVID and that. But, you know, this is much more concentrated. It seems like not quite as broad-based. I think it is indicative of investors really trying to-- that fear of missing out, that FOMO mentality, they are trying to find the next hot thing, and they're just beginning to chase it and pile into it. That obviously can work well, but it can also then end in tears, especially if you don't get into those names early enough.
But, you know, when bubbles begin to inflate, when they begin, it's not a bad time to start investing. It's when you get towards the end when they're beginning to burst and it really takes a lot of prudence and focusing on the trading conditions to identify when those bubbles might begin to burst.
BRAD SMITH: And so, Brian, here-- that aside, as we think about the broader market activity that we've continued to track here, we've got, of course, new all time highs that we've seen over the course of this year already in kind of this drift higher as we are still having lingering questions about whether or not there will be an AI bubble that bursts in that kind of drift higher mentality perhaps for some traders and what we're tracking. Where are the sectors that could still potentially outperform from your perspective?
BRIAN JACOBSEN: Yeah. And our investment committee, we've been talking about that as far as what's next as far as where the market narrative might shift towards. All right. So the people who like to chase the memes, What is the next meme? It could really be in the small cap space, and then also industrials, materials, and even the always boring utility sector. Those are the areas that have underperformed, and we think that they could outperform for a couple of different reasons. Utilities perhaps if we get a little bit of stability with rates and if they begin to drift lower, that could benefit utilities. But then as far as industrials and materials, those are much more cyclically-oriented.
And if we get manufacturing beginning to emerge from this long hibernation that it's been in, we think that's an area that is really poised to outperform for the next not just six months, but perhaps even a longer period of time if you look out maybe three years.
SEANA SMITH: Brian, Where does that leave tech?
BRIAN JACOBSEN: Tech is one of those where we think that you have to be in it to win it. So as far as we are allocated to tech and-- Actually, currently, we have an overweight to a lot of the technology names. It's just that once we get to a point where we get through earnings season, we think after we get out of earnings season, that's an opportunity to reassess where the valuations are to perhaps start underweighting. The bar is a little bit-- it's been raised, but they have a history of beating expectations. We think that this could be a period of time in which prices have really anticipated the earnings, and now they actually have to grow into some of those valuations.
So it could be almost sort of a movement laterally or to the side for tech over the next-- for the balance of the year.
BRAD SMITH: It's really interesting too, because, you know, as I think back to some of the data that FactSet publishes as well, talking about they're projecting a 7% increase in S&P 500 price over the next 12 months by some industry analysts here, it's going to have to come in that time on increased earnings expectations and this guidance coming in perhaps stronger than expected, even with the face of the likelihood of a recession and those concerns still lingering here. What is it that companies can say that will negate some of those concerns that still linger?
BRIAN JACOBSEN: Right now, I think the biggest concern is around margins, what's really going to happen with that distance between top line revenues and the bottom line earnings. What we saw with the latest earnings season is earnings growth was really good, while the sales growth was fairly weak. And so that actually shows that the profit margins, that distance between them, is pretty resilient. Companies have been able to rightsize and really navigate sometimes very challenging environments. Are they going to continue to be able to do that?
We think that a lot of the smaller companies and mid-cap companies have really good operating margins here and operating leverage such that if you do get just a slight uptick in growth in their particular sectors, that could really compound to the bottom line for investors.
