3 Investing Ideas for the Rest of 2024: Insights from Fidelity Strategist Denise Chisholm

As we approach the second half of 2024, the stock market has shown remarkable resilience and growth, with the S&P 500® posting an impressive year-to-date return of nearly 12% by late May. This performance comes despite higher-than-expected inflation and robust economic growth, which have raised concerns about potential delays in interest rate cuts by the Federal Reserve. Amid these dynamics, Fidelity strategist Denise Chisholm offers a bullish outlook on several key areas. Here are three investing ideas to consider for the remainder of 2024 based on her insights.

1. US Stocks Deserve Their Premium Valuations

Despite concerns about high valuations, Chisholm’s analysis suggests that US stocks still hold promise. The median price-to-earnings (P/E) ratio for S&P 500 constituents is near its highest level since 1990 compared to the median P/E for the MSCI EAFE index, which tracks developed-market international stocks. Historically, US stocks have performed well after being relatively expensive compared to international stocks.

Why US Stocks Are Attractive:

• Historical Performance: Since 1990, when US stocks have been in the top 25% of their valuation range relative to international stocks, they have outperformed international equities 84% of the time over the next 12 months.
• Earnings Growth: US companies have consistently delivered stronger earnings growth than their international counterparts. This is not solely due to the higher weight of high-growth sectors like technology in the US market. Even after adjusting for sector weights, US stocks have exhibited superior earnings growth and profit margins.
• Economic Fundamentals: The US economy’s robust performance, characterized by productivity gains, controlled inflation, and favorable lending conditions, supports continued corporate earnings growth.

Investment Implications:

Investors might consider maintaining or increasing their exposure to US equities, particularly those with strong earnings growth prospects. Fidelity offers a range of mutual funds and ETFs that focus on high-quality US stocks, providing a convenient way to capitalize on this theme.

2. Earnings Recovery to Boost Technology and Cyclical Sectors

The US stock market is in the early stages of an earnings recovery, with corporate profits growing by over 8% in the 12 months through March 2024. Analysts forecast an 11% earnings growth for the S&P 500 for the entire year. This positive earnings trend is driven by several factors, including productivity improvements, slowing inflation, easing lending standards, and increased manufacturing orders.

Why Technology and Cyclicals Are Poised to Benefit:

• Earnings Acceleration: Historically, periods of accelerating earnings growth (between 10% and 30%) have seen strong stock market returns. Technology and other cyclical sectors typically lead the market during such times, while defensive sectors like utilities tend to lag.
• Economic Cyclicality: Cyclical sectors, which are more sensitive to economic changes, are expected to benefit from the current economic environment. As corporate profits continue to recover, these sectors could see significant gains.

Investment Implications:

Investors looking to capitalize on this trend might consider increasing their allocation to technology and other cyclical sectors. Fidelity’s technology-focused mutual funds and ETFs provide targeted exposure to these high-potential areas, offering a way to participate in the anticipated growth.

3. Falling Rates Could Propel Undervalued Small Caps

Small-cap stocks appear historically inexpensive compared to large-cap stocks. The average price-to-book ratio for small caps is in the lowest 5% of its historical range versus large caps. Historically, when small-cap valuations have been this low relative to large caps, small caps have outperformed over the following 12 months.

Why Small Caps Are Attractive:

• Interest Rate Sensitivity: Small-cap companies, which often rely on floating-rate debt, were significantly impacted by the sharp rise in interest rates over the past two years. As interest rates are expected to decline, the cost of servicing their debt will decrease, potentially boosting profitability.
• Historical Outperformance: In past periods characterized by falling interest rates and accelerating economic growth, small caps have typically outperformed large caps. This historical trend supports the case for investing in small caps as rates decline.

Investment Implications:

Investors might consider increasing their exposure to small-cap stocks to take advantage of their potential for outperformance in a declining interest rate environment. Fidelity’s small-cap mutual funds and ETFs offer diversified exposure to this asset class, providing an effective way to access these opportunities.

Conclusion

The second half of 2024 presents several promising investment opportunities, according to Fidelity strategist Denise Chisholm. Despite concerns about high valuations, US stocks are expected to continue their strong performance, driven by superior earnings growth. Technology and cyclical sectors are poised to benefit from an ongoing earnings recovery, while undervalued small caps could see significant gains as interest rates decline.

Investors seeking to capitalize on these trends may find it beneficial to explore Fidelity’s range of mutual funds and ETFs, which offer targeted exposure to these high-potential areas. As always, it is essential to consider your individual financial goals, risk tolerance, and investment horizon when making investment decisions. Consulting with a financial advisor can also provide personalized guidance to help you navigate the current market landscape and optimize your investment strategy for the remainder of 2024.