The S&P 500 has reached all-time highs, buoyed by one of the most robust earnings seasons in recent memory, as optimism permeates Wall Street. High-profile technology stocks, including Nvidia, Alphabet, and Microsoft, have been particularly notable in the past week, contributing to a significant surge in the tech sector. The Roundhill Magnificent Seven ETF, which groups these top tech giants, has spiked by 32% over the last six months. With many analysts forecasting an imminent cut in interest rates by the Federal Reserve, the market sentiment remains upbeat.
However, Sean O’Hara, president of PacerETFs, raises caution regarding the heavy reliance of the broader market on a select few dominant stocks. He argues that it’s essential for investors to look beyond the popular Magnificent Seven and diversify their portfolios. O’Hara’s firm, which manages $40 billion in assets, includes members of the renowned group but advises a more strategic approach given the concentration of value within the stock market.
In an interview with Business Insider, O’Hara highlighted a concerning statistic: seven stocks constitute a staggering 52% of the value of the Russell 1000 Growth Index. This leaves a considerable number of stocks—385, to be exact—underrepresented in terms of market allocation. He expressed concern that such a cap-weighted ETF structure allows a handful of high-market stocks to unduly influence the overall performance of investments.
O’Hara recommends shifting some portfolio assets away from cap-weighted investments to incorporate historically underweighted stocks. Among the alternatives he pointed out are Applovin and Ubiquiti, both of which have experienced over 100% growth in the past six months, significantly outperforming their Magnificent Seven counterparts. He also cited Palantir and Palo Alto Networks as notable tech stocks that his funds have benefited from, as they exist outside of the overhyped group.
Additionally, O’Hara sees substantial promise in the healthcare sector, which he describes as remarkably underweighted compared to its historical performance. He believes advancements in artificial intelligence could accelerate the drug production cycle, further boosting this sector’s potential.
As for small and mid-cap companies, O’Hara suggests that these firms might take the lead if the Federal Reserve follows through with rate cuts. These smaller enterprises, often dependent on debt markets for funding, are particularly sensitive to interest rate fluctuations. While he encourages investors to explore opportunities in the small-cap and mid-cap space, he warns that those lacking profitability may face ongoing challenges.
In summary, while the market may be currently dominated by a few tech titans, O’Hara’s insights underscore the importance of diversification and the exploration of alternative investment avenues to mitigate risks and tap into potentially lucrative sectors.
