Investors shouldn't 'reach too far for risk': Strategist

While contending with September's seasonal volatility, stocks (^DJI, ^IXIC, ^GSPC) slide further in Friday's session in response to the August jobs data released this morning. While nonfarm payroll jobs growth came below economist expectations, the unemployment rate ticked down to 4.2%.

All of these factors are colliding with losses seen in the AI chip trade as semiconductor manufacturers Nvidia (NVDA) and Broadcom (AVGO) failed to wow Wall Street with their earnings beats.

John Hancock Investment Management co-chief investment strategist Emily Roland sits down with the Market Domination team to discuss which sectors investors can find more quality trades in while avoiding risk.

"The poster child for quality is mega-cap tech. We like that, but we do have a valuation issue there with the tech sector bumping up towards 30-times forward earnings," Roland explains. "So we want to look at other areas of the market quality at a reasonable price, if you will. So looking at sectors like healthcare, which are trading at a 10% discount to the broad market..."

Roland weighs in on Big Tech stocks, the AI trade, and the bond market (^TYX, ^TNX, ^FVX) ahead of the Federal Reserve's plans to cut interest rates.

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

This post was written by Luke Carberry Mogan.

Video Transcript

Your playbook for the stock market then Emily, what would you be advising?

What would you be telling clients?

Yeah, we're advising that clients just don't reach too far for risk.

We still want to be invested in this market.

And at the end of the day, stock prices are gonna follow profits or follow earnings and the earnings back jobs just fine if not quite good.

Uh So we want to continue to be invested here, but we're seeing cyclical areas catch a bid.

The weaker dollar has been helping riskier cyclical parts of the market like international equities.

We really want to focus on quality here.

These are companies with great balance sheets, lots of cash return on equity.

Um The poster child for quality is mega cab tech.

We like that, but we do have a valuation issue there with the tech sector, you know, bumping up towards 30 times forward earnings.

So we want to look at other areas of the market uh quality at a reasonable price if you will.

Um So looking at sectors like health care which are trading at a 10% discount to the broad market and we're starting to also leg into more defensive areas of the market.

Um utility stocks, for example, we're looking at infrastructure related assets.

We do expect to see a big shift in the consumer as people potentially push away from buying the things that they want to buy.

Please tell my Children, I said that but they're going to still do the things that they need to do.

So we think that those more defensive areas of the market uh deserve a look in portfolios.

I want to come back to tech for a moment when you say quality at a reasonable price.

What would be a reasonable price?

Because obviously the sectors come back, come down.

How far down would it need to come for it to look a little more reasonable to you?

You know, it's a great question.

Uh But uh you know, the challenge is that valuations have never been a great catalyst.

You know, I mentioned the tax bumping up on 30 times forward earnings, the valuations are elevated, but the earnings are elevated too.

And frankly, the denominator has mattered a lot more to us.

And you look at earnings for this quarter, the technology sector generated about twice the earnings results as the S and P 500 revenue growth was concentrated in a handful of technology names.

So we still like these um this part of the market, given the elevated earnings trends, but we have to recognize that they're overbought as well.

So I think it wouldn't be unreasonable to see a little bit of steam let out.

But what I would really be watching for, to underweight the sector is if there was some big shift in earnings dynamics and we're just not seeing that yet.

Emily, can I get your thoughts on the A I trade as well?

Um, you know, I asked because Broadcom reported, I think there were some who were hoping Broadcom was gonna report and ride to the rescue.

And after all, a lot of folks had moved into Broadcom because they saw it as a smart way to play that trend, but it did report right now.

We're down about 10% here, Emily and just your thoughts on that mega trend.

Yeah, I mean, it's the same thing with the video where the earnings results were decent, but they almost had to be amazing to get investors to continue the excitement around some of these stocks.

There was a lot coming into the price, going into this earnings season again, really driving the market higher and seeing that multiple expansion.

Um So, you know, I think it, it, it makes sense here that these names are taking a little bit of a breather.

Um but we still want to own and portfolios given the high quality nature and the earnings drivers that are inherent in the space Emily, you know, I gotta get in a bond question.

Uh So let's, let's talk about how you're currently thinking around the treasury market specifically here, right?

You would think the feds cutting yields are gonna come down, they have come down some, right, but kind of within a range here.

So what do, what do investors do with that?

Yeah, Julie, we would be looking again at every backup in bond yields as an opportunity to lean into high quality bonds.

We still see the income is very attractive uh in bonds, the aggregate bond index now yielding about four and a quarter.

What we do see, you know, there's this debate going on today about 25 versus 50 basis points for the fed.

That's cute.

Right.

The fed normally on a cut 17 times and the 10 year treasury yield falls on average 2.5 to 3% during those periods.

So we want to be looking at the total return potential that it's inherent in bonds, not only from duration, but also from the income.

We might have to wait a little bit for the duration part to kick in, but you can get paid to wait given that income is near the highest in over 15 years.