Last week the market experienced its sharpest correction of the year, with the VIX index shooting above 60 and the broad market falling more than 10% in just a few weeks. But the buying impulse has been even more surprising as the V-shaped recovery has caught many investors off guard.
In hindsight, it seems that the intense selling seen last Monday may have been a one-off event, with unwind of the Japanese carry trade causing a capitulation among the most levered traders. Even though stocks have rapidly appreciated from last week’s lows, many are still on sale, most notably stocks from the Magnificent 7, which make up the largest and some of the best performing in the market.
Looking back to last week’s lows, we can see which of the group has rallied the most. Relative strength is one of my favorite ways to find winning stocks as it often points to those with the most momentum and investor interest. Nvidia ((NVDA – Free Report) ), Meta Platforms ((META – Free Report) ) and Amazon ((AMZN – Free Report) ) have seen the fastest gains since the lows, leading me to believe they may continue to lead the Mag 7 and the broad market.
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Can Stocks Continue to Rally?
It can be hard to buy stocks right after they have run up, but history tells us that strength often begets more strength. However, markets don’t move in a straight line and if it is difficult to pull the trigger on these stocks, there is nothing wrong for waiting on a pullback. But when the pullback does eventually come, you must have the courage to execute the plan.
But how can investors be confident when buying pullbacks? If you take inventory of the broader picture, the economy and stock market should be conducive for the foreseeable future, giving investors security when buying. The economy is growing above trend and remained robust throughout the Fed raising cycle, earnings are growing nicely, and we can expect lower interest rates in the near future. With lower interest rates, we can expect the economy to begin expanding again, which should encourage profit growth at corporations and even some multiple expansion in stock valuations.
If we look at the seasonality chart, we can see that there may be some weakness in stocks in the second half of September into October. Additionally, with the US presidential election looming this fall, there may be some additional pangs of uncertainty, possibly adding to any temporary selloffs.
Thus, if we don’t get any pullbacks over the next week or two, investors can remain patient as there should be more buying opportunities before the year end.
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META, AMZN and NVDA Boast Incredible Earnings Growth
So, we covered why investors can be confident that the broad market should hold up, but what about Nvidia, Amazon and Meta Platforms are still so appealing as investments? More than anything, these companies are growing profits at truly incredible rates, especially for their immense size.
Although each of these companies has a Zacks Rank #3 (Hold) rating, reflecting flat earnings revisions trends, the earnings growth forecasts are more than reason enough to consider buying. Earnings per share (EPS) are projected to grow 37.6% annually at Nvidia, 27.4% annually at Amazon and 19% annually at Meta Platforms over the next three to five years. While not a perfect comparison, stocks typically appreciate in line with their earnings growth over the long term, which could translate to impressive price gains for these companies.
These companies sit directly in the front seat of the most important secular business and technology trends, which is why they expect such impressive growth. From Artificial Intelligence, to cloud computing, e-commerce, and digital communities, they will be the leaders in these high growth high profit businesses.
Furthermore, they all have fairly reasonable valuations, especially compared to historical averages. Meta platforms is trading at 25.3x, right in line with its 10-year median, Amazon is trading at 36.7x, well below its 10-year median of 93.6x and Nvidia is trading at 48.5x, just above its 10-year median of 42.7x.
Image Source: Zacks Investment Research
Final Thoughts
While the recent market recovery has been swift and robust, it’s crucial to remember that the market can be unpredictable. Although the economic environment and earnings growth for companies like Nvidia, Amazon, and Meta Platforms remain favorable, markets don’t move in a straight line. There could be pullbacks, especially with seasonal trends and the upcoming election adding potential volatility.
However, when these pullbacks occur, they should be seen as opportunities for disciplined investors to enter or add to positions in high-quality stocks. Always prioritize risk management and ensure that your investment decisions align with your long-term goals, as the market will do what it wants, regardless of expectations.