Apple and Other Tech Stocks’ Rally Could Falter. What to Buy Instead.

However the Nasdaq’s outperformance betrays a problem at the heart of the rally—namely, its overdependence on just a handful of big tech names that have soared, such as

Apple

(ticker: AAPL),

Nvidia

(BVDA), and

Meta Platforms

(META). Those megacaps have buoyed the index even as the majority of other stocks lag behind.

While that has been a boon so far, it has also left markets vulnerable if some of the highest-flying tech stocks should start to lose steam.

The good news is that some other sectors might finally be joining the party. As Stifel Market Strategist Barry Bannister notes, cyclical value stocks—such as basic materials, industrials, and financials—are now “in a catch-up price-to-earnings-led rally…which broadens the market” gains.

Of course, that limits the upside for indexes on a market-capitalization basis. Cyclical value stocks account for 24% of the S&P 500, compared with a “hefty” 44% for the cyclical growth names like tech, Bannister notes. Nonetheless, he predicts this more widely dispersed rally will help the S&P 500 climb to about 4,400 in the third quarter, a target he established last month—given ongoing “resilience and policy prudence [that] indicated to us no immediate ‘textbook’ recession.

There could, however, be some risk in the fourth quarter and beyond, given factors from the economy slowing (which has been mild) to the 2024 presidential election.

Moreover, Bannister’s target represents just under a 3% gain for the S&P 500 from current trading levels. That would represent a bit of a slowdown from the double-digit gains that the index notched in the first five months of the year.

Yet investors could be willing to trade smaller gains for wider breadth. If Bannister’s prediction that industrial, material, and financial stocks will keeping climbing plays out, they might do so more slowly than tech’s meteoric rise, but they would also provide support for the broader market should the handful of tech winners stall.

Write to Teresa Rivas at [email protected]