‘The S&P Hasn’t Peaked Yet’ — Here’s What to Buy Now

Joining me now, Liz Thomas, chief market strategist at SoFi. Liz, great to have you back. Great to be here. And I was just saying, I'm really glad that you're here because you are so good at breaking things down for us and explaining things. And I think there's a lot that needs to be explained right now in this market. So I will do my best. Let's dig right into it. We're continuing to see this rotation out of the out of tech. We've been seeing it especially this month. Is it a healthy sign that the rally is expanding or is it a warning sign? It's been, generally speaking, a healthy sign because the sectors that have been benefiting are the ones that you want to be benefiting. So financials being at the top of that list for me. Usually I look at financials as something that confirms or denies the economic strength and the broadening of a rally in the market. What you don't want to see is broadening into very specific defensive trades. So you don't want to see it coming out of tech and going into consumer staples directly. Unfortunately, that is what what's happening today. But I think that's just one day. So generally speaking the broadening out has been healthy. It's been cyclical and it's kept the index really healthy. We're talking about the S&P and even the equal weighted S&P. The indexes are doing really really well considering the fact that semiconductors are in a bear market. You had correction territory on the Nasdaq 100 recently. And now memory chips are down a bit too. Yet the S&P is still surviving. So I think that is all a good sign. As we see that money rotating into things like financials. So also industrials health care. Yeah. Do you think that those sectors are setting up for a real run. I guess industrials we have seen a real run. But do you look at it as they're going to leave this market or they're just hiding places until tech comes back. I think they're hiding places for now. Not necessarily that they'll suddenly go down if and when tech comes back. But I do think that some of this breather that we're experiencing, particularly in semiconductors, I mean, they were up over 100% in a very short period of time. So some of this breather, first of all, is a good sign that money has not left the equity market in wide swaths. Right. We're happy that it stayed in equities. And investor risk appetite has stayed strong. The sectors that are benefiting right now. Your question about will they be the leaders in this next market. I don't think that financials necessarily will be the leaders, but I think they can remain strong. Healthcare I think, can be a leader over the next let's call it 2 to 5 years. Because not only do I think investors search for growth opportunity there and pharma and biotech, but also healthcare can be one of the biggest beneficiaries of eye innovation as it moves into other sectors. So I'm very bullish on healthcare for the short, medium and even long term from here. That's not to say that we won't have some hiccups along the way. But I do think that health care can lead things. Where else are you bullish right now as you wait for it? Sounds like you're looking at what's going on with tech is just a breather. You expect it to come back, but yes. Where do you expect to see leadership outside of health care? Yeah. So I mean, I do think that tech continues to be the good trade. And frankly, you do have to bet on technology in order to believe in this market continuing in a bullish fashion and in order for the economy to continue with strength, because without tech, we don't really have that strength. Looking outside of that, though, you've got things like commodities that I would be really interested in for the rest of the year if I had a pile of cash laying around right now to invest, I would look at commodities, not because I necessarily think they're going to go parabolic, but because we're in a different regime right now. We're in a regime where inflation is still sticky. It's not at target, it's not super high, but it's not where we want it to be. And in an inflationary environment where rates are higher for longer, higher than we've been used to for a long time, and the bond market is no longer in this decades long bull. Right. That's a different environment than we've been in since, let's call it the 80s. So we have to shift our perspectives. And that's why we heard about things like 6040 is dead. I don't think 6040 is dead, but right now it's worth a rethink of putting something like commodities in as a diversify instead of bonds as that particular answer. So commodities are a good opportunity right now, in my opinion, at least for the rest of the year. And when you want to look at things like China outside the US, not only is it obviously really big into this, I race, but they continue to make strides towards expanding the middle class and expanding the consumerism, and eventually they're going to succeed, in my opinion. So I would be invested in China as well. Can you be more specific when you say commodities about what you actually mean? Yeah. Okay. So so there are some, schools of thought out there that we will have major weather patterns. This has been a year of extreme weather already. I'm no meteorologist, but if we have more major weather patterns, you may have things like crop disruption. So commodities like agriculture could actually show some really, really exciting times to the upside depending on those prices. Gold has been through a pretty bad rough patch recently. Silver as well. But gold may stabilize. And as we continue on in this geopolitical tension era, and if oil prices come down and stay down, you might actually see central banks return to buying gold and you could find some more opportunity in gold. So some precious metals, some agriculture, those would be the spots that I'd be looking at. But not necessarily as a safety trade. More so just as a diversified, you. Know, as a diversify or and actually we did some work on this recently and looked at through the regimes where you've got maybe rising rates or yields that are higher and inflation that's sticky. Commodities are a better diversify are to stocks than bonds are and then cash are. So adding commodities to a portfolio. If you think that this inflation regime is different and is lasting, which I do compared to the last ten years, 20 years, and if you think that bonds are now out of their multi-decade bull market and are entering a different type of period, which I do, commodities actually end up being the better diversify our. What should investors do with tech right now as we wait for whatever is happening to sort of shake out? Do they buy the dip? Do they sit tight? Do they finally take some profits, although not necessarily at the top? Yeah. I mean, if you're overexposed, if you're overweight and you're uncomfortable with what you've seen in the market recently, and you realized that what you've seen recently means that you are overweight too much and it's not allowing you to sleep at night, then, okay, take some profits that you don't usually want to take profits in a period. Especially we're talking about semiconductors. The market tends to overshoot on the upside and overshoot on the downside. And semis are already down. The last I checked was about 26% from the peak. You don't necessarily want to start selling out after they've had this big drawdown. So I would wait for some stabilization and then you can probably start to dollar cost average are way back in. But don't just put it back into one industry group. I think right now this particular environment from a trading perspective is really tough. It's very unforgiving. And investors have almost been trained to do what I call whale hunting. Everybody's searching for that next stock. That's going to be up 200% in 12 months for that next industry group. That's going to be like memory chips and be up a ton, right, in a very short period of time. Those are becoming harder to come by. And this market cycle is maturing. And on days particularly like today, I know this maybe won't drop until tomorrow, but on days where you've got the tech sector in the S&P, a third of the stocks are trading at 6% up or down or more. Those are humongous daily swings that usually suggest more volatility to come. So I would wait for a little bit of stabilization before putting a lot of money to work, but you can start to think about dipping your toes back in if you got if you got scared and you got out. What is it that you're looking for? Aside from no longer seeing 6% moves to the upside or downside to know that the market is stabilizing and we've probably seen the worst of it. Yeah. So first of all, yes, the daily swings need to be a little bit more compressed. I think already what I've stated is the sectors that are doing well are the ones that you want to be doing well. So there the risk appetite remains in the market, but you don't want to see is that risk appetite really break down. We've seen a break down in momentum, but it's been picked up by other parts of the market. It's been picked up by quality names. It's been picked up by earnings momentum and names that have earnings fundamental strengths underneath them. And I think that's a very healthy sign. You also want to see the VIX stay within a contained range. I do expect the VIX to go up a bit as we move through August and September. Generally speaking we usually see a couple little spikes in the VIX during this period. Whether it's because the fed is happening or there's news around the globe that's been kind of the the category of news that's done it in the last few years. But I want to see those single stock moves come down. And tech is the place where that's happening. Yes. Ultimately though, as you look at the fundamental picture, you think this is a market that will continue to move higher. I do I mean, the fundamentals are strong and and what I want people to remember too is and this is sort of a warning, the market peaks before earnings peak. So what you're really trying to figure out right now is has the market already peaked. And are we now on peak earnings watch. There's usually about a ten month lag between the two. It can be more it can be less. Averages usually never happened right on the on the nose. But I don't think we're there yet. I don't think we've seen the peak in the S&P yet. And why is that. Well first of all, because we're seeing breakdowns in the groups that we thought were going to be the ones that made or break the entire market. I mean, it was semi's down this notch, and the S&P is still up one 8% on the year. The equal weight is up more than that. And small cap is still like knocking the cover off the ball up 18%. So I don't think that the peak has happened yet. I think we'd be seeing much more of a breakdown in Small Cap in particular, and I think we'd be seeing much more of a breakdown in other sectors and much more clear defensive leadership. And that's not happening. So I don't think the peak in the market has happened yet. I don't think we're on peak earnings watch yet, but I do think investors need to keep that in mind as we move through the rest of the year and into 2027 that you're always watching for. Is this the best that earnings might get? And I think the driver of that is largely going to be the CapEx news, which has not slowed down yet, but many are expecting that it slows down in 2027, or at least the growth of it slows down in 2027. And some of the things that are happening already are cash flow turning negative for some of the hyperscalers. It's expected to be negative as a group in 2027. So market reactions to that could shift sentiment a lot. And that's what I'd be looking at. What should investors do while they wait for the market to stabilize, though? Well, I think you can rotate into some of those other sectors. I mean, some of them sort of we're looked at like left for dead. Right. And and banks were one of them. And now they've rallied quite a bit. But you can start to allocate to some of those sectors and making sure that you're diversified, not just in the market in general and not just across regions, but diversify within grows. And that doesn't just mean technology. That means communications and pharma and biotech diversify where you think the growth is going to be found. Something I haven't mentioned yet that I do still find a good investment is energy too. And that's war aside right there. There have been a big burst of bull market energy in the energy names because of a rise in oil prices. And then oil prices relaxed through June, and those names came down quite a bit. But that was a buying opportunity. And a lot of them have rebounded. And I think the fundamentals are there for energy and the demand is there for energy long term. So that's another place that you can look to allocate if you don't have any capital there. I want to go back to your whale hunting comment because you can't talk individual stocks. So we often talk stock picks. We will not do that with you, but it sounds like you're leaning more towards investors should be investing in ETFs anyway. They shouldn't try to be finding the next big, you know, Nvidia or Micron in hopes that they can see these, you know, huge returns. How much of an everyday retailers or retail investors portfolio should be in individual stock picks versus you know ETFs. Look obviously it's different for everybody. I think the fund money can be in individual stocks because it is fun. I do it too. I play around and I learn a lot from it, but I do it in a handful of names. I don't do it in a ton. I don't try to build my own portfolio of single stocks. There are people who are much better at that than I am in the ETF. Space is right now in this market. We've talked about the breakdown in momentum that's happened. There's been this huge pickup in volatility of the momentum factor. And what that means is you've got a market that previously when it was driven by momentum to the upside, it was almost as if you could throw a dart. And most things were going to do well, especially in the tech space. That is no longer the case. So right now in this market, I think you can do better as a as a regular everyday investor. I think you can do better buying ETFs. And I don't just mean that on you know, by the S&P broadly I would buy the equal weighted S&P. So that's RSP as an ETF. But you could also look at industry group ETFs. You can look at sector ETFs. You can get pretty granular without going to the single stock level. And that's where I would be allocating capital right now because it's really difficult in this environment to do the deep technical research that it probably requires to trade in it successfully. If you're not doing the deep fundamental research to find long term stock picks, it's you're going to get punished, probably more likely than rewarded. So I think buying those ETFs. And then the other thing is because risk appetite is still very strong. Buying puts on the index are super cheap right now. So you can buy those ETFs, get the exposure to the market that you want and even weight yourself towards certain industry groups and sectors that you really like, or even different regions. And then you can buy puts on something like the S&P and just protect yourself from major drawdowns that might happen and really affect sentiment. Before we get to our rapid fire round, I do want to ask you about what you avoid right now because you're still pretty bullish. A lot of opportunities that you've that you're finding out there even outside of tech, right. What areas are most vulnerable if we do continue to see this tech shakeout, if inflation does remain sticky, if oil prices remain high, or maybe they, you know, go even higher. Yeah. Well I think the stuff that remains the most vulnerable is treasuries, frankly. There's been so much uncomfortable volatility in the Treasury market. So treasuries are still vulnerable. I think tech is still vulnerable for a while. I do think that there's probably more volatility and maybe more downside to come, particularly in memories, memory chips that have gone up so much and haven't quite gone down as much as the rest of the semiconductor complex. There may still be more downside in semiconductors as well. Usually, the rule of thumb on a broad market is the drawdown that is absent. A recession is somewhere between 15 and 25%. With the recession, it's beyond that, usually even beyond 30%. We haven't seen a drawdown in the S&P that's lasted for really any period of time in a very long time. We've seen drawdowns, but they're quick. They're V-shaped recoveries, and that's how we've been trained now. So I actually think the vulnerable part is sentiment, where you've got investors who are so used to any drawdown, just bouncing right back and getting to new all time highs within a few weeks. That may not happen everywhere anymore as this market cycle matures. So you have to spread the lots. But if we do see that 10% correction, even that wouldn't shake your bullishness because that's normal. It's pretty normal. That would that would be a buying opportunity. I think usually when you get let's say you get to 5% down, then you're probably headed to ten ish. Right. It's you get to 1520. That's when you start to really search around for. All right. Is there a reason that we might be going into a recession? Is this a signal that the market is seeing that I'm not seeing? And if there isn't, then those are decent buying opportunities. But I think this market being so resilient in the face of downside in semiconductors, which was supposed to be, again, the flag in the sand, that was like if semiconductors go up, the market goes up. If semiconductors go down, the market goes down. That is apparently not the case. And I think that's been really, really healthy. So if someone only made one portfolio change after watching this interview, what is it that they should do? I think you buy some of the stuff that you haven't yet if you don't own healthcare, that's my first choice. If you don't own commodities, that would be my second choice. You don't own financials, that would be my third choice. You could even go into things like real estate energy. There are other options out there that I think most investors are underexposed to. Okay, I think it's a good time to pivot to our rapid fire came of this or that you've played before. Quick questions, quick answers. You ready? I am. All right. Here we go. Changing market or breaking market. Changing. Sit in cash or put it to work. Put it to. Work. Big tech or the rest of the market. Oh I have to choose just one or both, but I, I think the Meg seven comes back in the second half of this. All seven. Oh, I don't know about all seven, but I think as a group. Equal weight S&P or a market cap weights. Equal. Large caps or small caps. Large caps. Industrials or financials. Financials. Health care or consumer staples. Health care for us. Software. Semiconductors. Oh did they get the bargain hunters go for software. But it's going to take a while. Give it 2 to 3 years. Long term horizon there. Yeah ETFs or individual stocks. ETFs. U.S. or international. Oh U.S. growth or value growth rate cut in 2026 or higher for longer. Higher for longer. Rate hike in 2026? I hope not. Oil prices by year end higher or lower than 80. Lower stocks by year end higher or lower from here higher. One word to describe how your feeling about the rest of this year. Yeah. So they're nervously optimistic. Liz Thomas I always appreciate you joining us. Thank you so much for breaking all of that down for us. As Liz Thomas, chief market strategist at SoFi, if you enjoyed this street talk, check out our full interview with Peter Andersen. He actually says this is a stock pickers market and offered his top five picks.