Wall Street's wallflowers are worth another look

Fifth Third Bancorp

Yesterday 17:05

The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.
By Sebastian  Pellejero
NEW YORK, June 24 (Reuters Breakingviews) - Wall Street's gaze has remained remarkably narrow. Analysts expect AI to power another stellar earnings season, while the tech-heavy Nasdaq 100 Index .NDX has delivered over twice the S&P 500's .SPX year-to-date return. Yet panic may now be rising, with the Magnificent 7 — a collection of the most valuable U.S. tech stocks — posting a 8% median decline over the past month. Previously left-behind stocks tied to old-guard industries, meanwhile, may find support from a strengthening business cycle. Low expectations and relative investor neglect make them worth another look.
The imbalance is clear. Companies related most closely to chips, cloud computing, power and commodities make up just above half of the S&P 500 Index, but are expected to generate about 85% of this year's forecasted profit growth, per FactSet estimates.
By contrast, expectations for consumer, financial and industrial companies have drifted lower over the past year, according to LSEG data. Tariff scares, Middle East tensions, and growth fears repeatedly darkened the outlook.
Falling forecasts make upside surprises easier. AI-linked companies may continue to post the fastest profit gains, but their presumed success was already baked in. This week's selloff shows how quickly the tide can turn if anything threatens to inhibit the chatbot boom. Neglected operators have more room to outperform. First-quarter results offered a hint, with unloved S&P 500 sectors beating sell-side earnings estimates by anywhere from 5% to nearly 40%.
Signals point to further strength ahead. Manufacturing activity in May, according to an Institute for Supply Management survey, reached its highest level since 2022 as new orders accelerated. Commercial and industrial loan growth is up to roughly 8% from around 3% at the start of the year, while the Business Roundtable's CEO outlook index has reached its highest level since mid-2024. Consumers are also spending more on goods, with JPMorgan analysts expecting e-commerce growth to nearly double this year to about 10%.
Less flashy companies may be big beneficiaries. Regional banks like Fifth Third Bancorp FITB.N and Regions Financial RF.N are already seeing firmer corporate borrowing and would gain from a credit upturn. Reviving factory orders are flowing to industrial distributors like Fastenal FAST.O and W.W. Grainger GWW.N. An investor shift back toward goods may also favor retailers like Home Depot HD.N, left behind as consumers splurged on experiences.
This doesn't mean a wild boom is incoming. Sticky inflation has traders pricing in interest-rate rises, and oil prices sit over 20% higher from where they began the year. Both could sap economic growth. But for investors wary of how much rides on AI, neglected stocks offer a hedge. The old economy need only look a little less dated.
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CONTEXT NEWS
Major U.S. stock benchmarks were up between 0.7% and 1.2% on the morning of June 24 after two straight sessions of declines, as technology shares steadied after a sharp selloff earlier this week.

(Editing by Rob Cyran; Production by Pranav Kiran)
((For previous columns by the author, Reuters customers can click on PELLEJERO/ Sebastian.Pellejero@thomsonreuters.com))