Stocks to own ahead of a rally that this $15 billion fund house says is coming soon

The path to that begins with a slowdown and a short, sharp recession, Sit tells MarketWatch in an interview, as he lists some concerns — waning consumer confidence and retail sales and rising credit-card delinquencies.

“We continue to think that we are now…on the cusp of seeing a meaningful slowdown, and that’s why our forecast is that we are going to see a recession at the tail end of this year and the next year [lasting a couple of quarters], and so I think rates are peaking here,” said Sit, who expects a mild recession will spark a cut to interest rates from around 5.5% to 4.5%.

Note, some economists say third-quarter GDP could reach 5% annually when data is released Thursday, though that may not stop a slowdown.

And as the market tries to anticipate a slowdown and rate easing, the wheels are put in motion for end-year gains, says Sit, who helps manage $15 billion. “You’re going to start saying ‘OK, what does this look like by the end of the year?’ and start positioning accordingly. And that’s why we’re still hopeful that we’re going to see the end of year rally” and a broadening of tech-led gains this year.

Sit expects the S&P 500 to end this year at 4,350, which closed Tuesday at 4,248.

He suggests investors look inside and outside Big Tech for opportunities. Sit’s Large Cap Growth Fund SNIGX, which holds lots of those tech giants, is up an annualized 27% this year, keeping pace with its benchmark Russell 1000 Growth Index
RLG
RUI
(It’s up 11.4% on a five-year basis, vs. 12.4% for the Russell index).

Sit says Big Tech still has lots of AI benefits in the pipeline. His below chart shows a $900 billion potential market size for AI software by 2026, while another shows the price/earnings ratio for tech, commonly used in company valuations, hardly near the 2000 bubble levels of 50 times:

“So we think there’s more opportunities for those Magnificent Seven stocks to continue to go higher because the market is anticipating the AI opportunities are tremendous,” says Sit. His firm remains overweight on tech with Nvidia
NVDA,
-4.22%,
Taiwan Semiconductor
TSM,
-4.14%
 
2330,
,
Alphabet
GOOGL,
-9.23%,
Amazon
AMZN,
-5.67%,
Booking Holdings
BKNG,
-0.76%,
Palo Alto Networks
PANW,
-2.78%,
Adobe
ADBE,
-3.76%,
Salesforce
CRM,
-4.06%
and Accenture
ACN,
-1.48%
among their favorite names.

Other opportunities lie in plays on aging populations or a need for more productivity enhancements. Most stocks should be able to grow revenues and their bottom line even in a tough economic environment, he said, adding that look for companies with scalable businesses that can get pricing flexibility due to product need.

“And the same on the cyclical side and if we’re right, by the tail part of next year, the economy’s going to look better and we want to own cyclical stocks,” says Sit.

Their secular bets include Abbott Laboratories
ABT,
-1.37%,
Atricure
ATRC,
-3.80%,
DexCom
DXCM,
-2.07%,
Molina Healthcare
MOH,
+0.55%
and Centene
CNC,
-1.76%
— they are overweight in healthcare. On the cyclical side, they are bullish on energy and materials, with names like ConocoPhilips
COP,
-0.34%,
Cheniere Energy
LNG,
-0.32%,
Chord Energy
CHRD,
+0.08%,
MP Materials
MP,
-1.35%
and Shell
SHEL,
+0.31%.

Capital goods picks include Parker Hannifin
PH,
-1.32%,
Honeywell
HON,
-1.47%,
Jacobs Solutions
J,
+0.40%,
with FedEx
FDX,
-2.84%,
Knight-Swift Transportation
KNX,
-2.18%
and Alaska Air
ALK,
-0.19%
among their transportation preferences. Both sectors are overweight at Sit. “We want to be overweight in cyclical growth companies in capital goods and transportation because of our anticipated recovery,” he said.

Last word from Sit? Investors are a bit blinded by gloom: “Things could be a lot worse.”

The markets

Stocks
SPX

COMP
opened mostly in the red, led by tech, with the yield on the 10-year Treasury note
BX:TMUBMUSD10Y
up 8 basis points to 4.898%. Oil
CL.1,
+1.34%
is steady and silver
SI00,
-0.35%
is down 0.8%.

The buzz

Alphabet
GOOGL,
-9.23%
is down 6% on cloud disappointment, while Microsoft
MSFT,
+2.45%
is up 3% on revenue beats across the board. Texas Instruments
TXN,
-4.45%
is off nearly 5% on a sales miss and weak guidance.

Ahead of the open, Boeing
BA,
-1.20%
is rising after revenue and outlook offset a bigger-than-expected loss. Meta Platforms
META,
-3.31%,
IBM
IBM,
-0.67%
and Whirlpool
WHR,
-0.90%
wil report after the close.

New home sales are due at 10 a.m.

China’s troubled property developer Country Garden
2007,
-2.82%
reportedly defaulted on a dollar bond for the first time.

Israel pounded the Gaza Strip again, rejected ceasefire calls and called for the resignation of the United Nations secretary general.

A Category 5 Hurricane Otis slammed into Acapulco.

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The chart

Our chart of the day comes from Day Hagan Asset Management, which pushed out this post about an absence of S&P 500 record highs in 2023:

H/t to Patrick Dunuwila, editor and co-founder of The Chart Report for spotting this. He notes it’s been 21 months, or 660 days, since a new all-time high, the longest streak in a decade, though there’s a silver lining. “According to the data table, this drought in record highs could bode well for 2024. Years with zero record highs have historically seen a median gain of +13.1% the following year, while years with >35 record highs have seen a median gain of just +5.8%,” says Dunuwila.

The tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

Random reads

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