US shares set to keep rising this year: Larry Jeddeloh

Short sellers beware: investors can’t get enough of the Magnificent Seven, according to highly-regarded strategist Larry Jeddeloh.

Larry Jeddeloh, editor of The Institutional Strategist and founder of TIS Group, is bullish about the US market and the ‘Magnificent Seven’ tech stocks. Picture: Michele Mossop

Short sellers beware: investors can’t get enough of the Magnificent Seven, says Larry Jeddeloh.

After a 10 per cent fall from its July peak, the S&P 500 has risen about 7 per cent from its October low as the 10-year bond yield fell about 50 basis points after soaring about 100bps to a 16-year high of 5.02 per cent in the past few months.

Already it’s one of the stronger year-end rallies for the S&P 500 in the past three decades and well above the average rise of about 4 per cent from late October to year end.

But Mr Jeddeloh, the influential founder of TIS Corp, and editor of The Institutional Strategist, expects the S&P 500 to end December at its highest point for the year.

That would bode well for Australian shares even after the latest interest rate hike.

His forecast implies a further rise of at least 4 per cent in the S&P 500 in the next seven weeks.

But Mr Jeddeloh sees this rally extending into the March quarter, led by the likes of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla, which surged in the first half of the year, in large part due to investor enthusiasm surrounding the earnings potential of artificial intelligence.

Gains in the so-called ­Magnificent Seven already account for nearly all of the 15 per cent year-to-date rise in the S&P 500.

The tech giants have bounced about 10-20 per cent from their recent lows, led by gains of around 20 per cent in Amazon and ­Nvidia. Microsoft has hit a record high.

“Our view is you’re going to have a continued move up in the US sharemarket through year end and into the March quarter,” Mr Jeddeloh tells The Australian.

“People just don’t believe it. It happened too fast, they didn’t catch it and the shorts are hurting.

“But I think the sharemarket will just blow through all the bad news and it’s going to be led by tech.”

He says it “may be the last big move up (before a correction), but it’s going to be led by the Magnificent Seven”.

Mr Jeddeloh is due to speak at the UBS Australasia Conference on Tuesday.

He says the extreme concentration of market capitalisation in the Magnificent Seven is likely to have become a “major problem” for big passive funds that are underweight.

“They just can’t buy enough,” he said.

“That’s the problem with the benchmark investors like mutual funds, or even if you’re just running an individual account, these stocks make up so much of the index now.

“Most firms are afraid to buy that much of seven stocks … it just connects you to too much index concentration risk.”

Compliance departments at some of the biggest fund managers will be saying “you can’t do this”.

He recalls a similar situation in the Swiss market some years ago, when a handful of stocks made up most of the benchmark index. Funds that were being measured against the index had to own at least a market weight to match the index, but that opened them up to concentration risk.

At this point he thinks a lot of passive funds are underweight the Nasdaq.

He says the big seven stocks are “sort of being reclassified” by investors as being ‘‘defensive growth’’ and “unless we have a whopper of a recession, they are the guts of the US economy.”

“I think that’s exactly what’s evolving, and unless there’s a fundamental reweighting by the agencies like S&P, that fix these weights, it’s not going to change,” Mr Jeddeloh said.

On Friday the Nasdaq led the US sharemarket higher even as bond yields rebounded sharply after a disappointing 30-year bond auction, the S&P cut its outlook on the US credit rating (though that news came after the close) and reports surfaced about earnings estimates falling.

While the recent jump in bond yields may hurt the broader economy, Jeddeloh doesn’t see 10-year yields in the 4.50-5 per cent range as much of a valuation hurdle for tech giants.

“All the money has to go some place,” Jeddeloh says. “You can buy Treasurys and a lot of money has been parked in two years and less because you get 5.25 per cent, but they won’t buy the long end bonds because you’re getting 4.6 per cent with less liquidity, and they’re not going to do that until long end rates go up – you have to have a positive yield curve, which we don’t have.

“And the other thing about these big seven is they do share buybacks.”

“If you look at the 30 year Treasury, it’s 4.6 per cent. You look at a yield on the S&P 500, it is 160 (basis points), so you’re actually getting 300 basis points more on a long duration asset that has no growth, but there’s no buyback and you have volatility.”

He thinks rates aren’t high enough on the long end to attract capital away from the big seven.

In his view, US long bond yields would have to be 6.5-7 per cent to stop them.

Of course, 5 per cent bond yields could be a headwind for many companies and the economy after such a rapid move up from a record low of 33bps during the pandemic.

“What happens going into recessions is you’ll get capital in the equity market that we’ll head for large cap stock groups, like it did in the 1970s when we had the Nifty Fifty. It also happened just before the US housing bust, with a big move up in oil stocks, before the music stopped.

“So over the next two to three months, the stockmarket to us is going up and then we’ll see how it plays out in the Middle East, how the political cycle changes in the US, and what the Fed does next year.”