It has been a mostly great year for investors playing the S&P 500, provided they owned a small group of tech stocks. But it’s been a pretty ho-hum year for the rest of the index, which has been dominated by some big-name laggards.
“Part of it, in our view, is the average stocks better reflect some of the broader macroeconomic uncertainty and significant increase in the Fed funds rates over the past year,” Truist co-chief investment officer Keith Lerner tells Yahoo Finance.
Powered mostly by hype around new generative AI technology, seven stocks have fueled most of the S&P 500’s 15% year-to-date advance, according to data from Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
Another view from Goldman Sachs (chart below): 15 of the biggest companies have driven 86% of the S&P 500’s return year-to-date.
Apple is up 46% on optimism around some pricey new VR goggles. Amazon is oddly up 52% despite not announcing anything on the AI front and continuing to have poor quarters. And Microsoft and Alphabet have traded blows on AI developments, in the process driving respective stock price gains of 39% and 34%.
“These stocks have benefited from coming into the year in an oversold position, the excitement around AI, and earnings revision trends that have turned higher,” Lerner says. “Also, even if the economy slows as we expect, it’s likely that companies will continue to spend on tech, or fear of being left behind. That should be good for tech earnings on a relative basis.”
But non-tech companies haven’t fared quite as well. CVS Health is down 26%, Moderna is off 34% and VF Corp is down 31%.
Will the rest of the S&P 500 finally draw more interest from investors in the second half of the year? Pros like Lerner and BMO’s Brian Belski expect a modest broadening out of the market’s rally as investors seek out bargains and bet on no rate hikes in 2024.
“The bogeyman of narrow market breadth has started to broaden out and is a trend we expect will continue,” says Belski.
Here are three relative laggards from the S&P 500 this year that could gain favor on the Street.
BUY #1: AT&T
AT&T (T) has had a challenging first half of the year as declining subscriber growth, softer-than-expected sales and disappointing free cash flow levels kept investors away from the telecom giant.
But despite those headwinds, David Sekera, chief US market strategist at Morningstar, told Yahoo Finance that AT&T is a top pick.
“AT&T is at the intersection of being a deep value play,” Sekera said. “Fundamentally, it’s in a relatively strong position. We rate the company with a narrow economic moat, which means it has long-term structural cost advantages.”
Added positive: AT&T’s CFO Pascal Desroches told Yahoo Finance Live that key parts of the business have begun to turn the corner.
BUY #2: OCCIDENTAL PETROLEUM
Shares are off more than 8% year to date amid lingering worries of softening oil demand against a backdrop of sluggish global economic growth. And the oil producer is not alone. The S&P 500’s Energy Select Sector (XLE) is down 10% year to date following the sector’s massive 57.6% gain last year.
Occidental’s largest shareholder, Buffett has protected the stock from the worst of this year’s energy sector sell-off. He boosted his stake in the company to above 25% after buying 2.1 million more shares worth about $123 million.
So, as Warren Buffett doubles down on Occidental, Portfolio Wealth Advisors CEO Lee Munson sees an opportunity to bet on the ‘beaten up’ stock too.
“Back in 2019 they bought Anadarko – which means they own half the Permian Basin,” Munson told Yahoo Finance Live. “The Permian is the crown jewel. It’s cheap to extract, and once you pump it all out you can frack it to draw blood from a stone – printing money… I love that they have cheap production.”
BUY #3: CISCO
A challenging macroeconomic environment has left Cisco (CSCO) shares far behind its tech peers and the broader S&P 500.
The stock’s 7% gain so far this year pales in comparison to the Nasdaq 100 Index’s (^NDX) 36% surge. Investors have overlooked the maker of computer networking equipment amid concern clients are cutting back on IT spending. Orders declined 23% in its most recent quarter.
New Constructs CEO David Trainer told Yahoo Finance he sees the recent underperformance of Cisco as a buying opportunity, given “terrific fundamentals with a return on invested capital (ROIC) at 15%.”
Trainer added: “The stock also boasts an attractive valuation that implies just 4% profit growth over the next decade. We think the company will do closer to 9% or 10% growth in profits.”