Tom Lee, Fundstrat’s co-founder and head of research, says the firm is still bullish on the Magnificent 7 but notes the firm is now more interested in two equity sectors that have underperformed since 2021.
In a new interview on the Master Investor Podcast, Lee says he’s still sticking with the Mag 7 because he believes the stock group is poised to outperform the broader equity market this year.
But he says two sectors that have lagged could generate more returns and spark a wave of rallies based on historical data.
“We still like the Mag 7 because we’re confident of their earnings growth, and as long as they don’t de-rate, they should actually perform better than the market. But this year, our top sector picks are energy and basic materials. So in early December, we made those our favorite sector ideas. Part of it is a mean reversion trade. Energy and basic materials have underperformed so badly over the last five years that if you look at their performance in the last 75 years, it’s usually marked a turning point, the level of underperformance. And then I think some of the geopolitical things that are taking place would favor both groups.”
The market strategist also believes that broader stock market rotation is in sight as the Fed continues to ease and the ISM, an indicator of US economic activity, flashes signs of recovery.
“But I think another thing this year is the ISM is likely to break back above 50 and along with Fed cuts, that means industrials, financials and small caps. So I like Mag 7, but I think cyclicals could be the more interesting trade this year.”
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