"Valuations Are Reasonable Again": What Analysts Are Advising After the Sell-Off of Former Favorites

The July collapse of the market’s former favorites (momentum trades) alleviated much of the speculative overheating in stocks, according to Bloomberg. According to prime brokers, investors have largely reduced their financial leverage and closed many of the positions they had opened using it. This shakeout created opportunities to buy stocks that had fallen in price, particularly in the momentum segment—among stocks that had been purchased in anticipation of a continuation of the prevailing price trend.

However, it’s worth buying with protection against price declines and by diversifying your investments: recent volatility has shown just how drastically the results can change for those who neglect this. At the same time, macroeconomic risks are mounting: high oil prices are fueling inflation fears, the Fed is demonstrating its determination to bring inflation down to 2%, and accelerating price growth in the eurozone makes an ECB rate hike in September likely. The coming months could prove challenging, the agency warns.

Analysts at leading banks, whose views are cited by Bloomberg, view the situation from different perspectives:

“According to our estimates, investors’ reduction of leveraged positions in the technology sector—including the semiconductor segment, particularly shares of memory manufacturers—has progressed faster than we had previously anticipated. As a result, we now see fewer opportunities for further deleveraging,” say JPMorgan investment strategists led by Nikolaos Panigirtzoglou.

According to their data, hedge funds have largely completed their reduction of overall positions in the sector, while the continued high interest in short positions on individual tech stocks and the sector-specific VanEck Semiconductor and Roundhill Memory ETFs indicates a low net long position on these assets. Trend-following funds have also largely closed out their long positions in the Nasdaq, Kospi, Nikkei, and the Taiwan market, JPMorgan noted.

Société Générale expects an economic environment with higher inflation than markets are currently pricing in. Strategists led by Alain Bokobza attribute this to a second wave of U.S. tariffs, accelerated investment in AI and infrastructure, renewed volatility in oil prices, and large budget deficits in developed countries. “It is possible to benefit from inflation through selective investments in stocks,” they believe.

In the U.S., the bank favors the balanced S&P 500 as a bet on the real economy. In Europe, Société Générale recommends banks that benefit from high interest rates, mining and metals companies—for exposure to commodities and electrification—and manufacturers of materials for power grids, renewable energy, and AI infrastructure.

The sell-off has narrowed the valuation premium of U.S. stocks relative to the rest of the world to 22%—a more than six-year low, compared with a 10-year average of 31%, according to Bloomberg. “Opportunities are beginning to emerge to buy stocks at more attractive valuations,” says RBC strategist Lori Calvazina. According to her, the Nasdaq 100, the S&P 500, and the technology sector are once again looking “reasonable.”

However, a change in the Fed chair has historically been a challenging period for the market: following the appointments of Kevin Warsh’s three predecessors, the S&P 500 moved erratically in the first few months. Kalvazina expects the index to rise by the end of the year, but warns that “the movement of stocks will not be linear.”

Second-quarter earnings reports are beating expectations: S&P 500 companies’ profits are up 28.7% year-over-year, compared with the expected 23.2%, while European companies’ profits are up 14.4%, compared with 11.5%. Microsoft and Amazon have convinced investors that their massive investments in AI are paying off, and this is currently offsetting the interest rate challenge, according to Bloomberg.

"But with the earnings season coming to a close, attention will once again shift to macroeconomics—interest rates, inflation, and economic growth," said Lee Coopersmith, a derivatives specialist at Goldman Sachs. Treasury volatility has begun to rise again, while real yields remain near the highs of the current cycle. “Historically, this is not the kind of environment in which equity volatility remains consistently low,” Coppersmith warned.

This article was AI-translated and verified by a human editor