• Unrealized upside exists in three unbought sectors of the stock market, JPMorgan Asset Management says.

• They include the semiconductor, rail and parcel and home improvement industries, according to the company.

• These could be great portfolio additions as earnings growth in AI stocks begins to slow, strategists said.

Investors are still getting caught up in the genetic AI frenzy – but there are undervalued market sectors that could deliver profits like “coil springs”. according to JPMorgan Asset Management.

While the Magnificent Seven stocks — which include tech giants like Nvidia, Afterand Microsoft — posted a 50% increase in annual earnings per share in the first quarter, the rest of the S&P 500 is expected to cover.

By the fourth quarter of 2024, JPMorgan expects earnings expansion for the other 493 S&P 500 stocks to match that of the Magnificent 7, a dynamic seen in the chart below.

“Taking a longer-term view, significant fiscal spending, particularly on infrastructure (such as the Inflation Reduction Act and the CHIPS and Science Act), coupled with growing excitement around genetic AI, should provide an enabling framework for stronger secular growth. said the generals. “Markets do not appear to have fully priced in this forecast, which is reflected in the tight (and narrow) nature of the equity market rally.”

Investors looking for unrealized upside would do well to look for non-Mag 7 stocks with “fallen” valuations that have not yet been priced on earnings-growth coverage.

“These designations could therefore act as ‘coil springs,’” the note added, highlighting three specific branches:

Semiconductors. JPMorgan says there are many opportunities in the semis outside of AI trading.

“Sectors such as personal electronics, communications and business may recover soon as demand revives from lows left behind by pandemic ‘over-ordering,’” the firm wrote.

Rail and Parcel. These stocks are expected to rally due to the “unexpected resilience” of the US economy and the growing need to transport materials. Automation in the industry is also expected to increase efficiency, which could boost upside.

Home improvement. Americans have paused their home renovations, held back by high interest rates and the fact that many have already renovated their homes during the pandemic. But that trend is likely to reverse in the future, strategists said.

“As the average age of residence in the U.S. increases, the potential for significant maintenance costs increases. In addition, backlogs related to work on older projects are being cleared as immigration has helped solve labor shortages,” they said.

The story continues

JPMorgan’s proposals are indicative of Wall Street’s shift toward consolidation diversificationinstead of continuing to chase the gains of Mag 7. This came as uncertainty swirls around the election and Fed rate cuts next year. Some defense investmentslike energy and utilities stocks, they have made huge gains over the past year, with returns even beating top AI picks like Nvidia.

Read the original article at Business Insider