Advertisement
Canada markets closed

  • S&P/TSX

    21,807.37
    +98.93 (+0.46%)
     

  • S&P 500

    4,967.23
    -43.89 (-0.88%)
     

  • DOW

    37,986.40
    +211.02 (+0.56%)
     

  • CAD/USD

    0.7275
    +0.0012 (+0.16%)
     

  • CRUDE OIL

    83.24
    +0.51 (+0.62%)
     

  • Bitcoin CAD

    87,973.93
    +1,116.51 (+1.29%)
     

  • CMC Crypto 200

    1,367.36
    +54.73 (+4.17%)
     

  • GOLD FUTURES

    2,406.70
    +8.70 (+0.36%)
     

  • RUSSELL 2000

    1,947.66
    +4.70 (+0.24%)
     

  • 10-Yr Bond

    4.6150
    -0.0320 (-0.69%)
     

  • NASDAQ

    15,282.01
    -319.49 (-2.05%)
     

  • VOLATILITY

    18.71
    +0.71 (+3.94%)
     

  • FTSE

    7,895.85
    +18.80 (+0.24%)
     

  • NIKKEI 225

    37,068.35
    -1,011.35 (-2.66%)
     

  • CAD/EUR

    0.6824
    +0.0003 (+0.04%)
     

Will S&P 500 ETFs to Slump Ahead Except the Super Seven?

Sanghamitra Saha
·4 min read

Wall Street has not displayed such a bearish sentiment toward the stock market in more than a decade, per Wall Street Journal. The S&P 500 index would be negative for the year without the contribution of seven big tech companies.

These stocks are Nvidia (up 174.7%), Meta (up 118%), Tesla (99%), Apple (up45.3%), Alphabet (up 40%), Microsoft (up 39.4%) and Amazon (up 44.2%). Their rally has helped the S&P 500 gain about 12% this year (as of Jun 2, 2023).

So, basically, we've got a narrow market, where a few winners are driving the rally. Four of these seven companies are some of the largest in the world, with market caps of more than $1 trillion — Apple, Microsoft, Alphabet and Amazon — while Nvidia is loitering around that mark.

This is scary since if these stocks get overvalued and the economy lacks strength, the market will fall. Wall Street legend Bob Farrell's rules for investing: markets are weakest when they narrow to a handful of big names, and strongest when they are broad, per a Street article, also suggests the same.

Each of the Super Seven is Not Overvalued

Nvidia has a forward P/E of 52.7X versus an industry P/E of 36.1X. Tesla has a P/E of 60.1X versus an industry P/E of 19.6X. Amazon has a forward P/E of 79.4X versus an industry P/E of 25.9X. These stocks are overvalued. On the other hand, Microsoft has a forward P/E of 34.7X versus an industry P/E of 30.2X. Apple has a P/E of 30.2X versus an industry P/E of 26.7X. This group still boasts fair valuation.

ADVERTISEMENT

And Alphabet has a P/E of 23.1X versus an industry P/E of 30.2X. Meta has a P/E of 22.6X versus an industry P/E of 30.2X. The duo offers undervaluation, even after a rally. This means the S&P 500 rally is less likely to fade in the coming days, with several tech and communication companies still having strength for a greater run. This is especially true given that both Meta and Alphabet are binging on the AI boom, as is Microsoft. In short, Nvidia doesn’t tell the entire AI story.

Corporate Financials Likely to Mark a Rebound From Q3

The Q1 earnings season gave a consistent and stable performance, with companies surpassing expectations and offering a satisfactory outlook despite the unpredictable macro environment. As a result, the trend of revisions has recently shifted from negative to positive, marking a significant improvement after nearly a year.

Shifting Corporate Focus Fuels Optimism

Bank of America recently indicated that there has been a change in the focus of corporations. Rather than relying solely on factors like ultra-low interest rates, cost-cutting measures, and stock buybacks, companies are now directing their attention toward efficiency, automation and artificial intelligence. This shift suggests a move toward long-term sustainable growth.

Far From Overbought Market

The market is not overbought, indicating room for more potential upside. Presently, only about 40% of stocks trades above their 200-day moving average, in contrast to over 70% historically during overbought periods, per Zacks Research. This dynamic suggests that a considerable segment of the market remains untapped by the current surge and has the potential to benefit from further growth.

ETFs in Focus

Against this upbeat backdrop, if you have faith in the potential market breadth of Wall Street, investors may track S&P 500 ETFs like Vanguard S&P 500 ETF VOO, iShares Core S&P 500 ETF IVV and SPDR S&P 500 ETF Trust SPY.

Investors can also play the growth part of the index with SPDR Portfolio S&P 500 Growth ETF SPYG and the value part of the index with SPDR Portfolio S&P 500 Value ETF SPYV. SPDR Portfolio S&P 500 High Dividend ETF Fund SPYD is a good bet for the dividend plays of the index.

Investors can also bet on the leveraged S&P 500 ETFs like Direxion Daily S&P 500 Bull 3X Shares SPXL, ProShares Ultra S&P500 SSO and ProShares UltraPro S&P500 UPRO while the index is on an uptrend.

Bottom Line

The sectoral performance and P/E valuations support a case for a sustained rally. Furthermore, a run of strong U.S. data, such as an upbeat labor market, easing inflation, steady interest rates, and decent personal income, create a positive backdrop.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

SPDR S&P 500 ETF (SPY): ETF Research Reports

Direxion Daily S&P 500 Bull 3X Shares (SPXL): ETF Research Reports

ProShares UltraPro S&P500 (UPRO): ETF Research Reports

ProShares Ultra S&P500 (SSO): ETF Research Reports

Vanguard S&P 500 ETF (VOO): ETF Research Reports

SPDR Portfolio S&P 500 High Dividend ETF (SPYD): ETF Research Reports

iShares Core S&P 500 ETF (IVV): ETF Research Reports

SPDR Portfolio S&P 500 Growth ETF (SPYG): ETF Research Reports

SPDR Portfolio S&P 500 Value ETF (SPYV): ETF Research Reports

To read this article on Zacks.com click here.

Zacks Investment Research