Newscasts - Market Insight: Will value and small caps continue their rally in August?

Magnificent Hotel Investments

01/08/2024 17:55

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Source: 'Reuters - Business videos'

Description: Financials, healthcare and the IT sector outperformed the
Magnificent Seven in July, and Scharf Investment's Eric Lynch thinks the rally
can continue in August, as some Big Tech earnings disappointed, and as
investors worry about capex spending associated with AI.
Short Link: https://refini.tv/4fu8Sc7

Video Transcript:

Will value and small caps continue their rally in August. Welcome to Market
Insight. I'm Ludovica Brignola. Some Big Tech earnings disappointed investors
some didn't, such as Meta. And in July, many sectors rallied and outperformed
The Magnificent Seven, among which healthcare value and small caps. Will this
rally continue in August? Well, joining me now to talk about all that is Eric
Lynch, Managing Director at Scharf Investments, thank you very much for being
with us today. Right. So, in July, as you say, not just cyclicals and small
caps, I mean everything outperformed Magnificent Seven. Why and do you think
this rally has legs?

Yes. Nice to be here, Ludovica. Yes, it was the antithesis of what we've seen
the last year and a half where basically everything, but MAX 7 ran during the
month. And I think there's two reasons for that. And those reasons are
probably sustainable. Number one is earnings between the two sets are
converging. So, in recent quarters, MAX 7 has been responsible for more than
100% of S&P 500 year over year growth of earnings. This quarter, shipping up
to be a nice Q2 10% earnings growth. They're only responsible for about half
of that. Sectors like financials are experiencing year over year earnings
growth of 15%, healthcare 12%. The IT sector is growing still nicely and
leading at 17%, but that wide margin has narrowed. The other reason is I think
you're starting to see a lot of consternation amongst the investors set about
CapEx and associate with AI. And so that is also depressing some of the MAX 7
names.

Right. Admittedly several Big tech stocks like Microsoft and Alphabet missed
estimates and why? What happened there?

Yes, the real issue there is I think would because you're seeing some daylight
between those company’s that are clear 100% beneficiaries of AI spend. So
clearly the chipmakers, the data center hardware providers like NVIDIA, AMD
had a nice report and stock bid up. And those that are buying the chips that
are very expensive investing these massive amounts. And not seeing immediate
paybacks and so whether it's Microsoft or it's all with that, who are
reporting higher than expected CapEx and growth that didn't really exceed
expectations investors are penalizing them. Meta actually reported to CapEx.
So, it was a little higher but not materially higher than expected, but yet
their revenues kind of out outpaced expectations. So Meta was rewarded. So,
you're starting to see stocks punish or reward based on this AI spend kind of
issue.

Right. Interesting. Let's get to Apple now. Apple really lags in the AI space,
and iPhone sales are not really keeping up, especially in certain markets like
China. Are you more optimistic on Apple and its earnings?

Well, I think I have a nuanced response for your Ludovica. I think we're
optimistic that Apple has a chance with the AI introduction to accelerate off
of its really flat earnings and revenues since 2021. And so that's a positive.
You know the negative is that growth is really baked into the stock. It's
trading at 30 times 2025 earrings. And that's a little bit problematic. So,
we'll see what happens I do expect them to report some promising AI kind of
technology and some improvements. But if you look at the growth, you look at
the recent kind of market share take in China where they have about 17% of
their revenue based. You know that wasn't so positive. So, I expect it to be
probably mixed with Apple.

Interesting. And if Apple and Amazon earnings were to be positive. Do you
think this would have any impact on the NASDAQ after the recent pullback that
we've seen?

Sure, it would be supportive. Clearly in the month of July, these big, you
know, big name for down a lot, you saw a bit of a relief rally on the last day
of July. Things were pointing back again today. But yeas, clearly that's
positive. Amazon, we're a little bit more bullish on the business case. Amazon
does not have a high bar to beat as it relates to AI. Amazon is already
crushing it with AWS Implementation in the cloud. There also a lot of
investors don't realize how fast they're growing their advertising dollar
revenue on their E-commerce platform. So, both of those are kind of securable
market kind of drivers to the stock. So, I would expect Amazon to continue
really producing good numbers. Independent AI and so that will be an
interesting report to look at to.

Right. There's interesting one last point. As we were saying at the beginning,
one of the sectors that did outperform in July was the healthcare sector.
Could you give us some examples of some healthcare stock opportunities?

Yes. One of the I'm glad you asked that question Ludovica. One of the things
that we're seeing is kind of a false choice in the market right now between.
Okay. It's either it's either big tech or it's cyclicals or it's small caps,
you know, in between, there's a bunch of things that are pretty high-quality
average stocks in the sense that no one thinks about them, but they're
producing tempers earnings growth and they're cheap. Why is that important? I
think today is a good reminder that we inflation is coming down. We're all
excited about Paul's reference to potentially cutting rates potentially in
September, but the reason why is that you know, things were also slowing and
today you had two pretty negative prints in ISM manufacturing underperforming
expectations and jobless claims also being higher than expected. So, you know
as we run out of big tech, we might want to be also concerned about GDP growth
going forward and sustainability. So healthcare, Healthcare is a safe place to
kind of hide. And so, we see names like Centene that reported last Friday.
Stocks up, you know, mid-teens in a weak, because they're showing 10% earnings
growth expectations, and the stock was only nine times heading into the
quarter and it's still only about ten times earnings. So that's very
attractive versus Apple trading at 30.

It's really, really good analysis. Thank you very much Eric Lynch, Managing
Director at Scharf Investments, thank you for being with us today. And that is
your Market Insight