It’s been a generally great year for investors playing the S&P 500, provided they own a small group of tech stocks. But it’s been a pretty ho-hum year for the rest of the index, which has been dominated by a few big laggards.
“Part of that, in our view, is that average stocks better reflect some of the broader macroeconomic uncertainty and the significant increase in fed funds rates over the past year,” Keith Lerner said. , co-chief investment officer of Truist, at Yahoo Finance.
Propelled primarily by hype around new generative AI technology, seven stocks have fueled most of the S&P 500’s 15% year-to-date advance, according to data from senior analyst Howard Silverblatt. indices at S&P Dow Jones Indices.
Another view from Goldman Sachs (chart below): 15 of the largest companies have generated 86% of the return of the S&P 500 since the start of the year.
Nvidia (AI hype) and Meta (cost cutting and AI hype) led the charge for the S&P 500 with gains of 180% and 133% respectively. Tesla shares are up 109% (AI hype and strong demand for electric vehicles).
Apple is up 46% on optimism around expensive new VR glasses. Amazon is oddly up 52% despite not announcing anything on the AI front and still having poor quarters. And Microsoft and Alphabet traded blows on AI developments, generating price gains of 39% and 34% respectively.
“These stocks have benefited from starting the year in an oversold position, hype around AI and earnings revision trends that have increased,” Lerner said. “Also, even if the economy slows as expected, companies are likely to continue to spend on technology or fear being left behind. This should be good for tech earnings on a relative basis.”
But non-tech companies don’t fare as well. CVS Health is down 26%, Moderna is down 34% and VF Corp is down 31%.
Will the rest of the S&P 500 finally attract more investor interest in the second half? Pros like Lerner and BMO’s Brian Belski expect a modest widening of the market rally as investors hunt for bargains and bet on no rate hikes in 2024.
“The bogeyman of the narrow breadth of the market has started to widen and it’s a trend we believe will continue,” Belski says.
Here are three relative laggards in the S&P 500 this year who could win favor with the street.
BUY #1: AT&T
AT&T (T) had a tough first half as declining subscriber growth, weaker-than-expected sales and disappointing free cash flow levels drove investors away from the telecommunications giant.
But despite those headwinds, David Sekera, chief US market strategist at Morningstar, told Yahoo Finance that AT&T was a top pick.
“AT&T is at the intersection of being a deep value game,” Sekera said. “Fundamentally, it’s in a relatively strong position. We rate the business with a narrow economic moat, which means it has long-term structural cost advantages.”
Positive addition: AT&T Chief Financial Officer Pascal Desroches told Yahoo Finance Live that key elements of the business have begun to turn the page.
PURCHASE #2: WESTERN OIL
Occidental Petroleum (OXY), the Houston-based oil company backed by billionaire investor Warren Buffett, was surprisingly left behind.
Stocks are down more than 8% year-to-date amid lingering fears of slowing demand for oil amid sluggish global economic growth. And the oil producer is not the only one. The S&P 500’s Energy Select Sector (XLE) is down 10% year-to-date after the sector’s massive 57.6% gain last year.
Occidental’s biggest shareholder, Buffett, protected the stock from the energy sector’s worst sellout this year. He increased his stake in the company to more than 25% after buying an additional 2.1 million shares worth about $123 million.
So, as Warren Buffett doubles down on Occidental, Portfolio Wealth Advisors CEO Lee Munson also sees an opportunity to bet on the “beaten” stock.
“In 2019 they bought Anadarko — which means they own half of the Permian Basin,” Munson told Yahoo Finance Live. “The Permian is the crown jewel. It’s cheap to mine, and once you’ve pumped it all out, you can split it to draw blood from a stone – print money… I love it fact that they have a cheap production.”
BUY #3: CISCO
A tough macro environment left shares of Cisco (CSCO) far behind its tech peers and the broader S&P 500.
The stock’s 7% gain so far this year pales in comparison to the 36% rise in the Nasdaq 100 Index (^NDX). Investors overlooked the computer networking equipment maker as customers worried about cutting back on IT spending. Orders fell 23% in its most recent quarter.
New Constructs CEO David Trainer told Yahoo Finance he views Cisco’s recent underperformance as a buying opportunity, given “tremendous fundamentals with a return on invested capital (ROIC) of 15% “.
Trainer added: “The stock also benefits from an attractive valuation that implies earnings growth of just 4% over the next decade. We believe the company will do closer to 9% or 10% earnings growth. “
Brian Sozzi is the editor of Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Seana Smith is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith.