Market Leadership is Changing: What you need to do Right Now!

"After two years of monster market returns, 2024 is coming to a close with big opportunities—and even bigger risks. What’s next for investors? In this episode of The Money Runner, David Nelson breaks down 4 key strategies to navigate the shifting market landscape, insights into the fading dominance of the Magnificent Seven, and how to prepare for 2025’s biggest challenges. Tune in for actionable advice and data-driven stock-picking tips that can help you make your next move the right one. "

Disclosure: "At the time of this article I currently hold shares in some of the companies mentioned as part of investment portfolios in funds I manage for Belpointe. Additionally, I may discuss other securities that are under consideration for future investment; however, discussing these securities is not a recommendation to buy, sell, or hold. My mention of these securities reflects my personal opinion and analysis at this moment and may change without notice. Please remember that all investments involve risks, including the possible loss of principal."

Transcript

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What do we do now? That's the question. When you have a year like 2024. Monster returns in stocks this year, and that's, of course, on the heels of 2023. So back to back, well above 20% returns. The knee jerk answer is ring the cash register, step aside and look for a better entry point. Look, if you have a model that lets you sidestep downturns without being forced to get back in at higher prices. Yeah, go for it. But if you don't, then keep the volume up and let's lay out an investment backdrop and look at the market like a balance sheet, assets on one side, liabilities on the other. We are on the other side of the Thanksgiving break and typically markets tend to drift higher as we approach the end of the year. Earnings season is all but over. The election is in the rearview mirror and many of the new administration's cabinet picks and policy initiatives have been well telegraphed. Could something surprise us on the geopolitical front? You bet. And that's perhaps the biggest risk between now and the end of the year. The cease fire between Hezbollah and Israel, that could unwind Iran does something stupid and tries to fan the flames even further. Events in Ukraine spin out of control before the Trump administration is up and running. Unfortunately, There is no game plan for any of those possibilities other than to just dump everything and wait for the end of the world. Yeah. You sleep at night. More than likely, you'll get back in the market when it's at another all time high. I have a better plan. Welcome to the Money Runner. I'm David Nelson. Before we put the game plan together for next year. Let's lay out some of the risks and opportunities as we close out 2024 and transition to 25. Perhaps the biggest risk for stocks is that bond markets don't cooperate with the president's agenda. Now, I think for the most part, markets are embracing Trump's cabinet picks, especially Scott Bessent for Treasury. That immediately seemed to calm down the bond market, pushing yields lower. Now, remember, after the election, yields spiked in part because investors were looking for higher growth, but also concerned that some campaign promises might increase the deficit. Like it or not, the United States is still running debt and deficits that are a challenge for market stability. Now, I've got some good news and I've got bad news. The good news is that earnings estimates are rising so markets can push higher on something other than multiple expansion. In the last few years, the S&P 500 has seen its valuation climb from 17 times forward PE to close to 22 times. Yes, we are still in the early stages of one of the most powerful investment themes in our lifetimes, but we are pushing the edge of the envelope. The bad news is that we're going to get a lot less help from the Fed in September. Markets had baked in almost 150 basis points of cuts by the end of March. And that's just four months from now. Today, Fed fund futures indicate less than 50 basis points of accommodation. One of the more interesting observations this week came from Goldman's David Kostin. He points out that The Magnificent Seven earnings growth premium to the rest of the market is on the decline. Last year's excess return of the Mag seven was massive, and this year it's around 32%. Some suggest next year it could be as low as seven. You can see that playing out in the charts from Apple, Microsoft and Alphabet all underperformed the broader market this year. The heavy lifting was done by two stocks, Nvidia and Meta. Now, that's great news for equity investors, in particular, stock pickers. What does it mean? Well, to find out, let's dove in and see what's happening to earnings growth. Now, take a look at this slide. This is the S&P 500. And you can see that earnings growth last year was negative. This year, it's a respectable nine and a half percent. Next year, given what we're seeing in Washington and capital, continuing to come into the U.S., we should see some acceleration. Analysts are currently pegging estimates at about 12 one half percent growth for 2025. Now flip over to the max seven. It's a completely different story. Last year, the Mag seven delivered 20% earnings growth. No wonder it did so well. It was the only thing working this year, a staggering 68% growth and that's largely driven by NVIDIA. But this is where it gets kind of interesting. Take a look at next year. Next year, Mag seven earnings growth is going to come in at about 16 and a half percent. So the gap between the Mag seven and the rest of the market is going to narrow significantly. So what does that mean? It means the concentrate nation that analysts have been so concerned about will start to abate. Market returns will broaden out, and investors will start to find other stocks to generate returns. And that'll set the stage for the next leg of this bull market. Here are four things that can help you make your next stock purchase a winner. Estimate revisions, debt levels. Growth. Most important, how much you're paying for that growth. Now, obviously, there's a lot more to stock picking, but this will give you at least a starting point to help you stay out of trouble and make some money along the way. Let's focus on just what are these? Estimate revisions. Estimate revisions are the Holy Grail for quant stock managers like me. If estimates are still climbing, it means analysts are still trying to catch up to the fundamentals of the security. Look at this table. The list you're looking at is taken from the Russell 1000. Let's focus on the third column. Earnings estimate revisions over the last three months and I sorted this with the best on top. Now, remember this 970 other stocks in this index. I'm showing the best of the best when it comes to estimate revisions. We're looking at stocks with the highest positive estimate changes in the index over the last 12 weeks. Now, the column to the right of that, that's the three month return. Not a lot of losers there and some pretty big winners. And if you go over one more column, you're looking at year to date returns again, same story. Chances are if analysts are revising estimates higher for the last 12 weeks, they probably been doing it all year. You can repeat this exercise with sales, cash flow, even price targets. Now, let's be clear here. This is not the only data point you should be looking at when you pick securities, but it does show the power of quantitative analysis and data as tools and security selection. The stock story is important, but on its own it's just a story. The numbers behind that story pull it all together. All right. I'm going to leave it there for this week. I'll be enjoying today's show. And if you'd like to learn more about David Nelson and the Money Runner, hop on over to my substack site dcnelson123@substack.com I'm David Nelson. And this is The Money Runner.