We all have Nvidia ( NVDA ) to thank for the S&P 500 ( SPY ) finally breaking above 5000. Truly one of the most impressive earnings announcements in years. However, valuations for NVDA and the rest of the megacap tech space are running high, raising questions about whether a bubble is forming. Learn what investment expert Steve Reitmeister thinks about the current state of the market, along with a preview of the top 12 stocks to buy right now. Read below for more.
Artificial intelligence is all the rage. And no one is doing it better than Nvidia (NVDA). This was on FULL display in their incredible Wednesday as the market's gains lit a fire under stocks on Thursday…especially any AI-related tech stocks.
This led to an impressive breakout above 5,000 for the S&P 500 (SPY) to close the session at 5087. But should investors worry that not all stocks are participating in this rally. Like the small caps in the Russell 2000 are still in the red this year???
We'll discuss this and more in today's market commentary.
Market Commentary
February was marked by a persistent test of the 5,000 level for the S&P 500.
Twice before the stock closed above 5,000 for a brief period only to fall back down. But there is a feeling that this 3st time is of the essence with a further explosion possible on the way.
However, just like in 2023, gains look very isolated in megacap tech stocks as can be seen from this year-to-date chart focused on my market cap gains:
With history as our guide, a healthy bull market has small caps leading the way. That's because these smaller companies typically have superior growth prospects that push their shares above the pack.
This is why returns for small caps going back 100 years are typically 20% better than large caps. For clarity, this means that if large caps average a 10% return, small caps would do about 20% better with a 12% return (not a 30% return).
One theory is to say “the trend is your friendAnd so investors are best served by playing the big tech game until the party is over.
Back in the late 1990s, this was a great idea as long as you sold in the early 2000s at the first signs that the bubble was bursting. Unfortunately, investors rarely make these prudent moves. Instead, they tell themselves seemingly sound logic like selling when the stock returns to previous levels. This wrong thinking leads to disastrous results at the bottom of the bubble as stocks can so easily drop 50-80% in a fairly short time.
To be clear, I'm not saying that Mega Caps or AI stocks are as much of a craze as we saw in 1999 for Internet stocks. Nvidia and others are profitable companies growing at a phenomenal rate. But their earnings PE approaching 40X is a premium that history shows to have very low chances of future success.
It means that these shares are valued for excellence. They're likely to stay up as long as that excellence continues to unfold with each subsequent earnings report. But once there's the first blemish on that revenue prospect, then “watch out below!”.
Note that back in my days at Zacks Investment Research we ran a series of studies looking at the PE and projected growth rates of companies. Most would assume that the higher the expected growth…the higher the returns. And yet it was the exact opposite with the highest growth companies offering the lowest future returns.
This is precisely because of the higher PE and price-for-perfection problem mentioned above. Growth never stops over time. Whether its industry conditions or fierce competition, at some point the growth party ends. And when that happens, stocks explode and PE shrinks in size.
My guess is that most everyone has an allocation for these Magnificent 7 shares to take advantage of while this AI party lasts. This ownership is either directly in the individual companies or through ownership in SPY or QQQ that is dominated by these shares.
The question is, what will you do with the rest of your money, because it is not wise to have too many eggs in this basket that is becoming more fragile?
For me it is relying on my best investment advantage. This is a focus on proven best performance from stocks discovered by our POWR Ratings system.
Analyzing each stock from 118 factors that point to future outperformance, it's why the coveted A-rated stock has generated an average return of +28.56% per year since 1999. And this outperformance is appearing again this year.
Which POWR Ratings Top Stocks Am I Recommending Today?
Read below for the answer…
What should be done next?
Discover my current portfolio of 12 stocks filled to the brim with the best returns found in our exclusive POWR Ratings model. (Almost 4 times better than the S&P 500 since 1999)
This includes 5 recently added under-the-radar small caps with tremendous upside potential.
Plus I have 1 special ETF that is incredibly well positioned to outperform the market in the coming weeks and months.
All of this is based on my 43 years of investing experience seeing bull markets… bear markets… and everything in between.
If you are curious to learn more and want to see these 13 hand-picked lucky trades, then please click the link below to get started now.
Steve Reitmeister's Trading Plan and Top Picks >
I wish you a successful investment world!
Steve Reitmeister…but everyone calls me Reity (pronounced “fair”)
CEO, StockNews.com and Editor, Reitmeister Total Return
Shares of SPY were trading at $507.66 per share Friday morning, up $0.16 (+0.03%). Year-to-date, SPY has gained 6.81%, versus a % gain in the benchmark S&P 500 over the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in Reitmeister Total Return Portfolio. Learn more about Reity's background, along with links to his latest articles and stock picks.
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