Take a barbell approach to Mag 7, tech stocks: Citi strategist

Tech stocks rallied after the Federal Reserve cut rates 50 basis points, with some of the Magnificent Seven names like Tesla (TSLA) and Nvidia (NVDA) leading the charge. Citi head of US equity strategy Scott Chronert joins Seana Smith and Madison Mills on Catalysts to discuss how to play the tech sector.

“It's a buy the news, sell the news reaction to the Fed,” Chronert says. “The leadership this quarter has really been those areas of the market that are perceived beneficiaries of lower rates. So real estate, utilities, even the homebuilder ETFs have been hitting recent highs. In the meantime, tech is still lagging where it was last time the index was through 5,600."

“Essentially what you have here… is that a bit of a profit taking on the news in those areas that have been perceived as rate sensitive. And, at the same time, a catch-up move in that mega-cap growth cohort that ultimately does benefit from lower interest rates, but has been a relative laggard thus far this quarter. All told, what you've got is an index moving higher.”

Taking a look at the Magnificent 7, Chronert outlines Citi’s view on the group: “We've been arguing for the better part of this year that they're becoming more idiosyncratic in their behavior.”

He explains that Nvidia, Apple (AAPL), and Microsoft (MSFT) — who control over 6% of the index — "those companies are going to be important to index price action and I think you're seeing that today. But, what we're focused on from this barbell angle is we want to be holders of those, but when you look at the rate of increase in this and forward-year earnings expectations, it's been a stair-step function for over a year now. It's beginning to decelerate.”

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Naomi Buchanan.

Video Transcript

Well, tech stocks are surging off the back of the Fed's decision to slash rates by 50 basis points.

The NASDAQ leading all three major averages higher up over 2%.

Here in early trading, the stocks leading those gains.

A lot of it's being led by the MAG seven names, NVIDIA meta Microsoft Tesla.

Among the names soaring to the upside here today, here at the outlook for the tech trade.

His reaction to the Fed's decision, we want to bring in Scott Kroner and he is the head of us equity strategy at City Scott.

It's great to have you.

So it looks like the market, at least looking at this, the decision yesterday, some of Powell's commentary and that makes a lot of sense to be a risk on sort of sentiment right now.

What do you think?

Well, Sean, I think it's, it's a, it's a buy the news, sell the news of reaction to the Fed if you go back and step back and look at how we've gotten to where we are with the S and P. Thus far.

This quarter, the leadership, this quarter has really been those areas of the market that are perceived beneficiaries of lower rates.

So real estate utilities, even the homebuilder ETF S have been have been hitting recent highs.

In the meantime, tech is still lagging where it was last time the index was through 5600.

So I think essentially what you have here with given somewhat of a backup.

And as you point out in, in two and 10 year yields is that a bit of a profit taking on the news in those areas that have been perceived as rage sensitive.

Um And at the same time, a catch up move in that mega cap growth cohort that ultimately ultimately does benefit from lower interest rates but has been a relative laggard thus far, this quarter all told what you've got is an index moving higher.

We'd argue it's, it's more or less, you know, near our fair value um target, which is 5600.

So we'll have to watch how this, but I do think there's a, a tale of a couple of different markets under under way today.

Well, let's talk about the tail for the Magnificent Seven in reading your notes, Scott.

I'm considering whether or not I'm going to start not saying that phrase moving forward as a market anger, you said to turn to a Barbell approach, incorporating mag seven along with some other investment opportunities to talk to me a little bit more about that.

So I think, yeah, we've been saying for some time, the mag seven, I get it.

It, it's a, it's a great, you know, description of this cohort of companies, but we've been arguing for the better part of this year that they're becoming more idiosyncratic in their behavior.

OK?

So that's a starting point.

What we're getting at is that when you look at some of the key leaders and in particular NVIDIA on, on this, we get it, you've got three names that are 6% plus of the index, NVIDIA, Apple Microsoft, those companies are gonna be important to index price action.

And I think you're seeing that today.

But what we're focused on from this bar bill angle is we wanna be holders of those.

But when you look at the rate of increase in this and four year earnings expectations, it's been a stair step function for over a year.

Now.

It's beginning to decelerate though essentially what we're arguing is that growth projections are strong, 40% NVIDIA next year, 20% for the rest of the mag seven.

That's something that you have to recognize, appreciate and, and respect and that kind of augers to we want to be holders of these names.

But the lift in terms of getting a more material upside projections from here needed to make these names.

Still, the serious outperformer is getting more difficult.

In the meantime, as we go down cap into let's call it midcap tech.

If you will, we're finding a more attractive set up many companies that play to this broader A IA I implementation theme that have a less onerous implied growth, expectation, still strong consensus, earnings growth.

And therefore we think the set up for a catch up move, call it a broadening within tech is a really important and interesting way to think about playing this broader trend going forward.