Transcript:

Caroline Woods: Joining me now, James Demmert chief investment officer at Main Street Research. James, welcome back to the desk. Great to have you.

James Demmert: Good to be here, Caroline.

Caroline Woods: All right. So you’re sticking by your S&P 8,100 price target which months ago seemed very bullish. You’re saying it’s still in the cards. What do we need to see in the next month and a half really to get us there.

James Demmert: Yeah. It seemed far away not too long ago. Now it’s getting closer and we think we get there and it’s going to be driven by just a few things. One is continued strong economic data. This economy’s picking up some steam. 3.6% GDP last week. That tells us we think we get to four rates a stronger economy. What what goes after that is continued strong earnings growth and not just in the technology area.

James Demmert: We think we’re going to see strong growth across the markets. And then lastly, the thing that’s really been missing from this market is we need better investor sentiment. Investors are been really dragged down by the concerns around AI. So there’s been a lot of fear I think mostly, and we need the technical picture. We’re very oversold in this market typically from these oversold levels with a little bit more optimism.

James Demmert: We should get a good rally going into the end of the year. On all those earnings and GDP numbers.

Caroline Woods: So of those three pillars, which is on the shaky ground right now.

James Demmert: I’d say market sentiment. I think that’s really where the psychology of the investor, even though we’ve had really good earnings from some of the some of the tech companies and certainly outside of tech, we haven’t seen the market really get up and go. And I think that’s what we’re going to need to see.

Caroline Woods: But obviously post-election rally, there’s a lot of positive sentiment following the midterms. Is that enough or do we need to see something else to kind of keep this sentiment positive?

James Demmert: Well, we would say you’ve got the September October seasonal. Not great. So that’s past us. Here we are in November, the midterms getting that past us. I think that is going to open us up to what is there left to worry about. And I think, just some good earnings perhaps, perhaps the Nvidia earnings which are not far away, any of those things will start to bring what we would think a melt up in the year P/E ratio has been very compressed.

Caroline Woods: What would make you abandon the 8,100 price target?

James Demmert: I think a Fed mistake. I think if you see the Fed come too strong, like trying to raise rates, you know, 50 basis points. They are very adamant about this inflation number that they have been able to tackle. I think a Fed mistake of raising rates too aggressively could send the message of the economy is now going to tumble and stocks are not going to like that.

James Demmert: I don’t think that’s going to happen, but that would be a risk.

Caroline Woods: But to your point, you were talking about big tech earnings being strong. You’ve also said that investors have kind of misunderstood big tech. So strong earnings don’t necessarily translate into gains. So how does that how do you kind of you know skirt that situation here.

James Demmert: Yeah it’s been difficult. You know you see companies like Microsoft or Amazon or Google report you know very healthy numbers. And you know biggest concern investors have around the tech trade is all this investment. And what is going to come out the other end? Are we going to get a great return on investment. And frankly those numbers related to cloud and so on were fantastic.

James Demmert: But investors still continue to carry their fear mostly on Google’s search, not the cloud. And so I think there’s a misunderstanding amongst investors that hopefully we’ll get clarified over the next coming weeks as they start to think about those numbers from Anthropic or Google. Those numbers were great. The P/E ratios or gosh, they’re so low now. They’re almost as low as they were in 2023.

James Demmert: That value trap or that that bedrock proposition should allow these stocks to rally.

Caroline Woods: Are you bullish on the Magnificent Seven right now?

James Demmert: We are now much more than we were before. The PE is again the price earnings ratio is have compressed a lot. And the growth rates I mean they’re continuing to continue to be stellar going forward.

Caroline Woods: So if you had to rank them from 1 to 7 most bullish to least who gets the number one spot.

James Demmert: I would say, even though it has enacted well, Google, Amazon would probably be one and two on our list.

Caroline Woods: And seven.

James Demmert: Tesla.

Caroline Woods: And 3 or 4 or 5 or 6.

James Demmert: Nvidia would be three. I’ve got to remember you just.

Caroline Woods: Meta Microsoft.

James Demmert: That it would be six. Microsoft would be in the middle and I think that’s.

Caroline Woods: Did we get them wrong?

James Demmert: I don’t.

Caroline Woods: Even know. I wasn’t even keeping track. But why and why Alphabet and Amazon over Nvidia.

James Demmert: I think that’s more of a PE versus growth. The stocks have done nothing if not gone down the earnings. We just saw. Those releases continue to be very good. Maybe not perfect in all segments but particularly in the cloud. They’re great. And that tells us forward growth is going to be great at these amazing price earnings ratios.

Caroline Woods: Apple that was the one that we didn’t include. Where does Apple.

James Demmert: Trade. How could we have forgotten. Yeah we we love Apple. We’re a big holder of Apple as well.

Caroline Woods: Where does Apple fit in the above Nvidia.

James Demmert: I’d say I’d say it’s in the middle. So you have seven and that would be the fourth. Okay. Right there in the middle. It’s a safety trade. Trading at 35 times earnings. Stocks are not cheap. Margins were a little not as good as we’d like to see. But I’d still like to stock. I think what they’re going to do in AI in 2027 is going to be.

Caroline Woods: So if you had new money to put to work right now, would it go into the Magnificent Seven or would it go into other areas of the market?

James Demmert: Well, the best value, I’m glad you asked that question in this market is the AI trade, and it’s almost across the whole thing. So you could do Magnificent Seven, the hyperscalers, which act really well now, I think the semi industry, I mean, the semiconductor industry now trading at 15 times earnings, it’s almost hard to believe that was 30 times earnings a year ago.

James Demmert: So the semi trade and any AI infrastructure, even Caterpillar which has come down a lot because of the data center fears. So I think that’s where the best value is for new money. It’s of course makes you a little nervous going into some of these stocks with these concerns. But that’s where we have to use market psychology as our benefit.

James Demmert: Right. Make sure you go where maybe if no other investor wants to.

Caroline Woods: So in semi specifically what names do you like outside of Nvidia.

James Demmert: I think you want to say really high quality there. So you want to go with Nvidia. AMD which numbers were very good. Recently to stay in those high quality and the ones around it Taiwan Semi ASML.

Caroline Woods: Micron.

James Demmert: Micron absolutely for memory. And we also as we always suggest investors not just here in the U.S. right. Go overseas Taiwan Semi ASML in the Netherlands. Play that semi business. Not just here in the U.S..

Caroline Woods: Which part of the AI trade do you look at as most vulnerable right now.

James Demmert: I think that that’s the area that acts the worst. And it looks like it’s going to have a little bit of trouble. Is the electrification trade, which is connected to AI. So companies like GE Vernova, Siemens Energy, they don’t act well. I’m very curious what those earnings are going to look like. And that could be related, you know, again, to the concerns of the data center, how much electricity do we need?

James Demmert: Is it going to end up slowing more than we thought? That’s going to directly affect.

Caroline Woods: But isn’t there a disconnect? Because if there are new data center concerns, now that we’ve seen this blue wave, it’s not just the names that have been getting hit hard today, like maybe gas and iron and copper, we’ve that would be hit. Wouldn’t it be some of the the hyperscalers names as well. So why is there a disconnect in terms of what we’re seeing play out in tech, and who could be hurt from a slowdown in data center build outs.

James Demmert: The data center buildout problem, which I frankly think is completely overdone. I think that we can’t slow that down if we want to keep up and ahead of China, I think, I think no one wants it in their backyard, but somebody will because there’s a lot of profits to be made.

Caroline Woods: And you think Congress understands that?

James Demmert: I think they’re going to have to. And I think also the the appetite for knowledge from AI is way bigger than, you know, where we’re going to put these data centers. So. So that’s our view. We think it’s overdone. And that’s why we think the whole complex is a value. But for now, if you already have data centers, you’re going to benefit from those that are trying to build in scale who need to get new ones.

James Demmert: So that puts Google in a good place, right? Amazon in a good place. Anybody who’s already having these data centers, they’re going to be a safer trade if you will. However I would suggest yes, it’s riskier in the in the ones that are trying to grow into it. But that risk is probably going to come back in return if you if you’re patient over the next.

Caroline Woods: And those names would be what.

James Demmert: That would be anything like a CoreWeave. CoreWeave is a great example. They need more data centers to be built for them to make that business model make any sense and stay above water.

Caroline Woods: So you come on sometimes and do opportunity or trap with us is CoreWeave have an opportunity or a trap.

James Demmert: I think it’s a trap. I just we love strong balance sheet companies dominant market share. But the balance sheet there just is very concerning.

Caroline Woods: What about SpaceX?

James Demmert: I think space is a fabulous idea. Not something that I would buy now. I think as it matures, that’s a company that we want to look at.

Caroline Woods: Okay. For someone who already has a lot of exposure to tech right now, isn’t necessarily interested in adding more, what should they be doing? Where should they be putting their money to work?

James Demmert: It’s a great question. I think investors have gotten sort of like, you know, all they can think about is investing in tech, and that’s a mistake. Technology does represent 40% of the S&P 500, so you probably should be equally weighted to that. And, but what we’re suggesting is, wow, look at the health care companies all hitting new highs.

James Demmert: And our view is in 2027 AI is coming to health care. It’s going to increase, the research and the development of the drug, the drug, products. So there’s a lot of sectors out there that are outside tech that have great opportunities. We have a problem with oil prices. You should be in the energy trade, right?

James Demmert: Valero. Chevron. The financials are still in a bull market. We want to be in those financials. Whether it’s the big banks and again overseas HSBC in London or Barclays in London, Allianz in Germany the insurance space. So lots of great sectors.

Caroline Woods: But to your point you have said healthcare is trading at new highs. We’ve seen a lot of interest in some of these names already. Is it too late to get in here?

James Demmert: I prefer to buy a weakness. So my feeling would be I wouldn’t put new money where the momentum has really gone to, where they’ve taken them to new highs. But I would definitely be buying those on any pullback.

Caroline Woods: So give us your pullback playbook. What names are you looking to see if decline so that you can put more money.

James Demmert: In health care. Go to pharma go to Johnson & Johnson and Lilly. Great ways to play that great balance sheet. Very cheap stocks as they’ve been ignored for a long time. Go to biotech to Jazz Pharmaceuticals. They do oncology. Great way to play that.

Caroline Woods: What about in energy.

James Demmert: And the energy play? Love Valero. Love Chevron.

Caroline Woods: But still waiting for a pullback on those.

James Demmert: Wait for a pullback on those.

Caroline Woods: Okay. I do want to I saw you brought a few other picks. You talked about packing your passport going international Hitachi. Another name that you’re bullish on and Royal Bank of Canada. So explain why you like those two names as well.

James Demmert: We love Japan. We think that the Prime Minister is taking a page from the US playbook. Let’s make this economy grow. First time we’ve seen that decades. Stocks that are ridiculously cheap. Hitachi big Industrial Electrical company does business all over the world trading at 11 times earnings. So a great way to play the Japanese, industrial sector.

James Demmert: And then Royal Bank of Canada. We love financials. And we think that even if the Fed is just nudging rates up gradually, the financials can benefit from that. And Royal Bank of Canada does a lot of AI banking. They do a lot of M&A and they have a tremendously profitable wealth management service.

Caroline Woods: Going back to the Fed. You had said a 50 basis point hike might derail your bullish thesis, but you’re expecting S&P 8,100 by year end with another Fed rate hike in December.

James Demmert: Yeah, we think the Fed is going to go in December because they didn’t go when they had a chance to, just a couple weeks ago. And this is all going back to we have stronger and momentum in GDP growth here in the US, which is led by productivity growth, which is from the AI sector. There’s a lot of productivity growth.

James Demmert: So that’s going to continue to increase lots of demand in the economy, which is going to raise prices. And the Fed is going to be pressured continually, not just at the end of the year throughout next year, to gradually nudge rates up to keep that inflation lid on. So we think they go. But I think at the same time, the bull market can sustain that as long as their gradual rate.

Caroline Woods: Rises and you’re looking at it sustaining the momentum even through 2027, because you’re actually out with your 2027 price target. And that’s S&P 9,100, which seems like such a huge number. But when I was doing my iPhone math, 8,100 is 5% from here, 9,100 is 12% from there. So basically 12% is where we are right now in terms of year to date gains in the S&P 500.

Caroline Woods: What’s going to drive that kind of rally?

James Demmert: Strong economic growth going to have to have that followed by very broad earnings growth. I think that the the bull market’s going to change its stripes and its color in 2027. It’s going to be the bull market of everything not just tech. And so.

Caroline Woods: Literally everything.

James Demmert: Well probably not certain things I think higher rates are not good for real estate investment trust. I think we’re still going to have a problem there.

Caroline Woods: Everything with an asterisk. An asterisk. Okay. So no rates.

James Demmert: Yeah. And I think utilities could be problematic. Rate rises are not really great. That’s not a really good growth story anyway. I think the consumer discretionary space, which has been just a mess that comes back in 2027.

Caroline Woods: With higher rates.

James Demmert: Yeah, because I think the economy is going to be strong enough to hopefully get the consumer back on its feet.

Caroline Woods: So what do you start buying if you think that consumer discretionary, which we have actually been seeing a bounce, it’s a one of the best performing sectors today. We saw a bounce earlier this week. It’s still underperforming.

James Demmert: Right.

Caroline Woods: Which companies benefit most in consumer discretionary. What do you want to buy here.

James Demmert: I think you want to think about if if the consumer is gradually getting stronger, start with low cost providers. Ross Stores is a position we have. Great, inventory management. Walmart going to be report reporting earnings in a couple of weeks, maybe next week. Walmart.

Caroline Woods: Yeah. We’ll have a whole day of retail.

James Demmert: Very interested in Home Depot here at low P/E. Multiple. People can’t buy a new house anymore, but they could certainly fix it. So, so we’re looking at those consumer discretionary names after being away from it now for a few years.

Caroline Woods: So this broadening that we’ve already been seeing beyond big tech obviously tech and favorite today because of the election bounce. But we have been seeing a lot of interest in other sectors outside of tech, sometimes at the expense of tech. More recently, the broadening that we’ve been seeing you think will continue, but tech will start to get more involved.

James Demmert: Yeah, I think I think tech will. I think tech is the cheapest relative to growth rate here. So it’s going to definitely get more involved and maybe very acutely between now and the end of the year. But 2027 I think you’re going to have a bull market and everything in tech will trade well, but not quite as dramatically as we’ve seen.

Caroline Woods: So you’ve given us a whole bunch of stock picks. But for a retail investor, how do they position then for year end in 2027. What does that portfolio look like?

James Demmert: Well, you have a really oversold market today. So I would suggest for investors who are nothing but cash use, take this as an advantage to buy stock right in this environment here and buy in different sectors. Right. So I think out of the 11 sectors, there’s two that I probably stay away from. And I would build a portfolio across all these sectors.

James Demmert: And I wouldn’t forget to bring my passport at Main Street where 40% outside the U.S.. So we really mean what we say there and stay within those sectors and, and invest gradually over the next, let’s say, 4 to 6 weeks. So you put yourself in a position that as the market rises, you’re going to start to participate, but not all at once.

James Demmert: And then you have it. You set yourself up good for 2027.

Caroline Woods: So of the 60% that’s in the US, how much of that is tech?

James Demmert: In fact it’s interesting about the same amount is in tech in foreign stocks as it is in the U.S. and we are about 40% tech.

Caroline Woods: So 40% tech, 20% is divided amongst all the other seven sectors.

James Demmert: Is that, well, 40% of our total equity is is tech okay. And then the 60% is all over the place. And energy, big position and consumer staples, the big biggest, the second biggest position to tech is financial stocks.

Caroline Woods: Okay. So a tech and financial heavy portfolio heading into 2027 avoiding housing, avoiding utilities. What level does oil need to reach before you say okay I think we’ve seen the the the benefits in the energy trade and maybe time to get out there.

James Demmert: You know, I think there’s a that’s a catch 22 with the price of oil. You know we want to be in it because the profitability is there. I’m concerned if we go above 120. Brent, for too long, we have an economy problem. So, you know, anything between where we are now, let’s say 117 on the high end and Brent or, or lower, maybe to 95.

James Demmert: You want to own the oil stocks? If we break below 95, Brent, I would probably not want to be in that trade. And that’s probably because we have the Strait of Hormuz being safely passed.

Caroline Woods: Okay. All right. So basically bottom line, we before we pivot to rapid fire this or that, your best advice for retail investors as they look at today’s rally worry about the AI trade despite what’s happening as they think about year end in 2027. Your best advice for them is what.

James Demmert: My best advice is with the AI trade. If you own it, be really patient here. It’s very oversold. And I think a lot of the bad news is already in the price when it comes to the data center, which is really what the news is all about. So stay there. Be patient there. If you don’t own enough of it, buy more.

James Demmert: Other than that, there are some amazing companies in these other sectors that have been quite ignored for the last few years. So invest in the health care space which we talk to.

Caroline Woods: But that’s not ignored because it’s Eli Lilly is near all time highs right.

James Demmert: Well yeah. Again I would want to buy those on weakness. Okay. Definitely. But buy the financial stocks I think that’s even you could do that today. The consumer discretionary very carefully, move into that space.

Caroline Woods: Yeah. Actually, let’s go back there because I’m just trying to think what was your pick for consumer discretionary trust, or do we have any others here because you know, there’s names like Nike, Lulu. Oh and Home Depot. Sorry, but what about names like Lululemon Nike that have been beaten down some of the other retailers.

James Demmert: You know, and actually today that some of those are really rallying. I would not go towards that rally. You know the reason.

Caroline Woods: Why.

James Demmert: Market share losses both companies Lulu for sure. And valuations they’re not cheap okay.

Caroline Woods: But when to me Ross Stores and Walmart isn’t reflective of a strong consumer. So yeah.

James Demmert: And I don’t think we have that yet okay. So I want to I want investors to go carefully low cost provider first. The days of LVMH and those high end consumer discretionary, I mean, we’re not there yet.

Caroline Woods: Okay. Wearing it but not buying it, not buying the stock. All right. Thank you for refreshing my memory. It’s, I think it’s a great time to pivot to our rapid fire round of this or that. Quick questions, quick answers. No hedging. Are you ready, James? I’m ready to sell off buying opportunity or more pain ahead.

James Demmert: Great buying opportunity Magnificent Seven.

Caroline Woods: Undervalued or expensive? Undervalued. One Magnificent Seven name you’d avoid? Tesla. Biggest AI risk: overspending or overvaluation?

Caroline Woods: Overspending. Nvidia or AMD?

James Demmert: Nvidia.

Caroline Woods: Nvidia or Broadcom. Nvidia. AMD or Broadcom? Broadcom. Microsoft or Alphabet?

James Demmert: Alphabet.

Caroline Woods: Alphabet or Amazon? Amazon. I think you had Alphabet as your number one in that list. So the viewers are going to bet you like them both. You’re going.

James Demmert: To get.

Caroline Woods: Apple or Nvidia. I do like your move.

James Demmert: Apple.

Caroline Woods: Micron or SK Hynix, Micron. Semiconductors or software?

James Demmert: Semis.

Caroline Woods: One software name you do like if it’s not Microsoft.

Caroline Woods: Alger neoclouds by the dipper. Stay away, stay away. Bigger threat to stocks. Higher interest rates or higher oil prices.

James Demmert: Higher oil prices.

Caroline Woods: Next six months. U.S. stocks or international. International. 2027: Magnificent Seven or the rest of the market?

James Demmert: Rest of the market.

Caroline Woods: Best opportunity technology or financials?

James Demmert: Technology? Without question, you.

Caroline Woods: Finish this sentence. The most undervalued Magnificent Seven stock is Nvidia. The AI stock with the most upside over the next 12 months.

James Demmert: Is Nvidia.

Caroline Woods: The biggest threat to your S&P 8,100 price target?

James Demmert: Is the Fed.

Caroline Woods: The one stock you’d buy today and hold through 2027 is.

James Demmert: Johnson & Johnson.

Caroline Woods: All right James, I really appreciate you playing your quick answers, all of your stock picks and your perspective. Thanks so much, James. That’s James Demmert chief investment officer at Main Street Research. If you enjoyed this street talk, check out our full interview with Gus Scacco. He reveals the stocks he’d be even at all time highs.