Is it high noon for the Magnificent Seven?

Market Recap

• Equity markets rallied this week alongside another move down in bond yields.

• The S&P 500 rose 2.2%, led by banks, materials and consumer discretionary, but all sectors posted gains.

• Meantime, the TSX gained 2.7% as rate sensitives sprung back to life, and technology jumped almost 7%.

Inflation

Last week, the U.S. inflation rate for October came in lower than expected at 3.2%, down from 3.7% in September. This is unambiguously good news. Over the previous few months, inflation had ticked up—nothing massive, but still the wrong direction. A few weeks ago, comments made by the U.S. Federal Reserve (Fed) seemed to indicate their preference for not raising rates any more. This inflation number gives the Fed more data to support staying on the sidelines and inch towards eventual rate cuts. Not surprisingly, markets reacted positively to the inflation news, rallying strongly following the announcement.

Bottom Line: The latest U.S. inflation number is a very bullish sign for markets, because lower inflation means that we’re closer to the end of the rate cycle.

Q4 Outlook

We were expecting some softness in markets in September and October due to seasonality and positioned correctly for that pullback. However, valuations now look more compelling, and as such we have added risk back to the portfolio. Early indications in November, with the markets rallying, seem to be consistent with our positioning. But will this momentum continue through the end of the year? As I mentioned last week: we’re currently seeing cracks in the economy, but nothing is broken. Furthermore, we think the Federal Reserve’s comments were quite the change in tone and set us up well for a strong Q4 rally. December likely won’t be quite as strong as November has been so far, but we do see the upward trend continuing. That’s ultimately why we’re overweight equities for the first time this year. Meanwhile, recent earnings announcements from major retailers like Macy’s and Walmart, as well as rising jobless claims, highlight the fact that the consumer is weakening. We’ve been expecting this, as higher interest rates were always going to have an impact on spending, and that impact has grown as the year has progressed. However, the consumer if far from being in bad shape. On top of that, the holiday season is around the corner, and people typically spend more during that period—even if it means adding to their credit card debt.

Bottom Line: We’re bullish heading into the end of the year, but we’ll be closely monitoring spending during the holiday season, as it could foreshadow what will happen in 2024.

The Magnificent Seven

Can the Magnificent Seven stocks—Apple, Alphabet, Microsoft, Amazon, Meta, Tesla, and Nvidia—continue to push even higher? We think they can. In general, the Magnificent Seven are Quality companies with a significant presence not only in the economy, but in consumers’ pockets. As a result, they are sometimes perceived more like Consumer Staples than Consumer Discretionary. Take, for example, smartphones—if I’m reevaluating my expenses, I might choose to eat a little bit less before I give up my phone, and I suspect a lot of people would feel the same way. The companies also have great balance sheets and are tied to themes, like artificial intelligence (AI), cloud computing, and automation, that are likely to persist for longer than just three-to-six months. Have some of the companies moved up a little too fast? Yes, and it’s also worth noting that we don’t like all seven companies equally. But overall, they’re innovators of the global market, which combined with their strong fundamentals and foothold with consumers makes them still attractive for long-term investors.

Bottom Line: Over a three-to-five-year time horizon, many of the higher-performing innovation companies are the type of companies we would favour.

Positioning

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Stocking Up for a Holiday Rally.