Today’s market is led by one of the most confusing dynamics seen in the latest cycle; markets are hitting all-time highs while most stocks seem to be struggling to reach even their 52-week highs. Bond yields are going up in trader bets that the FED interest rate cuts will not be here as soon as the market had priced them in to come. But, after all, it is a bull market.
As has been the trend for the past couple of years, from 2020 to 2023, today’s hype and momentum are still focused around the world of technology stocks. Taking the hindmost in this space, whose performance you can measure by following the Technology Select Sector SPDR Fund (NYSEARCA: XLK) has left the broader S&P 500 behind by as much as 22.5% over the past twelve months.
One of the prominent examples of just how much appetite there is for the words ‘Artificial intelligence’ can be taken from the price action over at NVIDIA (NASDAQ: NVDA) against the rest of the technology ETF. Over the past year, NVIDIA stock has outperformed by 175.0% on a massive rip. You see a most recent example in ARM (NASDAQ: ARM), which also more than doubled this week. If your portfolio needs exposure to the next potential rally, you should keep reading.
What is happening?
The U.S. economy has split away from its historical norms that typically follow the business cycle. There are two economies today, whereas the engine used to churn as one. You can spot this divergence by following the ISM manufacturing and services PMI indexes, where a widening gap is driving traders – and the FED – into a corner.
Over the past twelve months, U.S. GDP (the size of the economy and thus the market) has advanced. Still, the advances aren’t really coming from the manufacturing sector as that PMI index has been in a contraction for the past 12 months. Knowing this, you only have one place to run towards, services.
In contrast, the services PMI has delivered expansion readings during the same period, which confirms that this is the only place in the economy where you – and the big guys on Wall Street – will likely find unexpected growth.
After pinpointing the momentum in the tech space, here are the best candidates to see the next doubling. You can consider adding these to your ' turnaround' watchlist by focusing specifically on the business services tech stocks, which could be the ones attracting the attention of professional traders and money managers.
You may have heard about the massive rally on Palantir Technologies (NYSE: PLTR) on their latest explosive earnings announcement; that stock nearly doubled in a single day in true Arm fashion. Even after that rally, markets still believe the ceiling is not here. But more on that later.
Another worthy mention, for reasons that will become clear in just a bit, can be Spotify (NYSE: SPOT), a stock flirting with its 52-week high prices and offers the most growth in earnings for the next twelve months as far as the group goes.
A story without numbers is a fairytale, and you are not here to invest in a pretty picture, so here are some numbers.
Breaking down the evidence
Two things you should keep in mind when translating the market’s message to find out where it wants certain stocks to move in the near future are earnings growth projections alongside how much these future earnings are worth paying for today.
Taken as an average, the business services sector (tech-focused) is expected to grow its earnings per share by 34.0% in the next twelve months. That is your benchmark to find positive outliers, putting the odds in your favor for another rally.
Now, how much are markets willing to pay for this future growth? You can take the forward P/E ratio to figure this out; its average is 25.5x today. Time to see who is the best candidate here, Palantir vs Spotify.
In the case of Palantir, analysts expect EPS to jump by 31.2% in the following year, which is below the industry average, making its 60.5x forward P/E a bit hard to justify. It looks like the growth could be already priced into the stock. Thus, a dip buy could be a more sensible approach to this story.
That leaves Spotify as the last worthy candidate. This stock is expected to grow its EPS by 48.3%, above the industry average and Palantir’s projections. This could be one of the reasons why it also trades at 48.2x forward P/E, which should be higher than Palantir, but at least it’s an 89.0% premium to the sector.
You can mix and match the numbers and the story all you want, but while you decide, keep in mind that the hype is after A.I. after all, so make haste in your considerations.
