Stocks to own before a predicted rally by a $15B fund house

NEED TO KNOW

A chill has descended upon the tech sector this Wednesday, largely due to Alphabet's underwhelming performance in the cloud services arena. As Therese Poletti at MarketWatch points out, investors are eager for the rapid delivery of AI-driven advantages.

In the spotlight today

we have insights from Roger Sit, the Chief Executive and Chief Investment Officer at Sit Investment Associates. He advises maintaining faith in Big Tech while also preparing for market expansion beyond what he terms the "Magnificent 8." These include Meta, Amazon, Apple, Google, Microsoft, Nvidia, Tesla, and Netflix.

In an interview with MarketWatch

Sit discusses his outlook for the market, emphasizing the potential for a deceleration in economic growth, which may lead to a brief but intense recession. He points out some troubling signs, such as dwindling consumer confidence, sluggish retail sales, and a rise in credit card delinquencies.

"We believe that we are on the verge of a significant slowdown, and that's why we forecast a recession at the end of this year and into the next [lasting a couple of quarters]," Sit explains. He expects that a mild recession will trigger a reduction in interest rates from approximately 5.5% to 4.5%.

It's worth noting that some economists suggest third-quarter GDP might reach an annualized growth rate of 5%, although this may not be sufficient to halt the impending slowdown.

As the market readies itself for an economic downturn and potential interest rate cuts, Sit believes that this sets the stage for year-end gains. He manages assets worth $15 billion and notes, "You're going to start saying, 'Okay, what does this look like by the end of the year?' and start positioning accordingly. And that's why we're still hopeful that we're going to see the end-of-year rally, leading to a broader surge in tech-related gains this year."

Sit anticipates that the S&P 500 will finish the year at 4,350, while it closed at 4,248 on Tuesday.

He encourages investors to explore opportunities within and beyond the Big Tech sector. Sit's Large Cap Growth Fund, SNIGX, which includes many tech giants, has seen an annualized gain of 27% this year, keeping pace with its benchmark, the Russell 1000 Growth Index. Over a five-year period, the fund is up 11.4% compared to 12.4% for the Russell index.

Sit remains confident that Big Tech holds substantial potential in AI. He points to a chart illustrating a $900 billion market size projection for AI software by 2026. Additionally, he notes that the price/earnings ratio for tech, often used in company valuations, is far from the bubble levels seen in 2000 when it reached 50 times.

"We believe there are more opportunities for these Magnificent Seven stocks to continue rising because the market anticipates tremendous AI opportunities," Sit asserts. His firm maintains an overweight position in tech, with Nvidia, Taiwan Semiconductor, Alphabet, Amazon, Booking Holdings, Palo Alto Networks, Adobe, Salesforce, and Accenture among their preferred picks.

Further opportunities lie in sectors related to aging populations and the need for productivity improvements. Sit believes that most companies should be able to grow their revenues and profitability even in a challenging economic environment. He recommends focusing on companies with scalable business models that can adjust pricing according to product demand.

"In the same vein, on the cyclical side, if our predictions hold, by the latter part of next year, the economy should show signs of improvement, and we want to own cyclical stocks," adds Sit.

In their long-term investment strategies, they favor companies such as Abbott Laboratories, Atricure, DexCom, Molina Healthcare, and Centene in the healthcare sector, where they maintain an overweight position. On the cyclical side, they express optimism about the energy and materials sectors, with companies like ConocoPhillips, Cheniere Energy, Chord Energy, MP Materials, and Shell receiving favorable mentions.

Capital goods selections include Parker Hannifin, Honeywell, Jacobs Solutions, FedEx, Knight-Swift Transportation, and Alaska Air among their transportation preferences. They have an overweight position in both of these sectors. Sit clarifies, "We want to be overweight in cyclical growth companies in capital goods and transportation due to our anticipated recovery."