Stocks with lasting potential past the current rally, as suggested by an ETF manager, include those from Nvidia, Tesla, and other companies.
In a recent statement, Sean O'Hara of Pacer ETFs has urged investors to exercise caution and consider diversifying their portfolios. O'Hara believes that the broader market has become too reliant on a handful of large stocks, a trend that has been evident in the recent performance of the S&P 500, which is at an all-time high after one of the strongest earnings seasons ever.
One such group of large stocks that has been performing exceptionally well is the top tech stocks, including Nvidia, Alphabet, and Microsoft. However, O'Hara suggests moving away from cap-weighted portfolios and overweighting historically underweighted titles in indices.
The Russell 1000 Growth Index, for instance, is dominated by seven titles that make up 52% of its value, leaving 385 stocks underweighted. This trend has led O'Hara to recommend looking beyond the so-called "Magnificent Seven" by investing in smaller tech stocks like Applovin, Ubiquiti, Palantir, and Palo Alto Networks. These stocks, with market capitalizations lower than the Magnificent Seven, have risen more than 100% over the past six months.
The Roundhill Magnificent Seven ETF, which focuses on these seven large tech stocks, has also seen significant growth, rising 32% over the same period. However, O'Hara believes that investors should not rely too heavily on this ETF and should consider diversifying their investments.
O'Hara also sees potential in the healthcare sector, historically underweighted, and suggests considering small and mid-cap companies, especially if interest rate cuts by the Fed occur. He believes that AI could help companies in this sector shorten their drug development cycles, making it an interesting area for investment.
With the expectation of a Federal Reserve rate cut this week, market sentiment is positive. Smaller companies, particularly those that finance themselves through debt markets, could benefit from these rate cuts due to their sensitivity to changes in borrowing costs. However, O'Hara expects these companies, especially the non-profitable ones, to face headwinds.
In conclusion, Sean O'Hara's advice to investors is to exercise caution, diversify their investments, and consider smaller tech stocks and the healthcare sector, especially if interest rate cuts occur. While the Magnificent Seven has been driving indices to new highs, O'Hara believes that small- and mid-cap companies could take on a leadership role if the Fed pushes through rate cuts.
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