The tech trade looked stretched until about a month ago, and a sell-off followed. There will keep being winners and losers.
Nvidia and the Jensen Huang story
A story about Jensen Huang pulled down Nvidia (NVDA) but not the rest of the AI trade. The hit is very specific to the company. Early reports say there were no major trade secrets involved that would cause big worry. Still, it could be a problem for the company and for Huang himself. In the past, these kinds of stories have not always kept stocks falling, but this time there is enough uncertainty that it could be damaging.
Compare the two chip names. Over three months, AMD (AMD) is up 5.8%, while Nvidia (NVDA) is down 23%. There were analyst calls on AMD the day before. Nvidia was in the original AI game, then investors spread their money to other names. This looks like a short-term rotation. If the review or investigation turns up more details, there could be more downside. Nvidia stays the main leader in the space, so it would take a lot to really hurt the company going forward, unless specific trade secrets come out, which does not seem to be the case now. There is also the matter of the $7.5 billion in sales of chips to China, which can be worked out; the trade-secrets part is the real concern.
Washington gridlock
Gridlock usually is not bad for the market. In almost every midterm election going back 60 years, the market was positive 12 months later. This time should not be treated as different. Gridlock tends to bring more spending, and that may hold again now. The overhang is rising rates, and whether that is enough to pressure the markets remains to be seen. Historically, gridlock after a midterm has been a positive for stocks.
Year-end targets and rotation
Some targets floated for the S&P 500: 7,900 for year-end, 8,400 by midyear next year, and 10,000 by the end of the decade. My own view is the market will rotate more. Over the past few months, semiconductors corrected over several weeks, and there was a global energy crisis that now looks to be easing. Through all of that, there was no major market sell-off, just down days here and there and a rotation. The chance of more rotation is real; for example, the equal-weight S&P could beat the market-weight S&P.
To set up for that rotation, look for sectors that are growing earnings and sit at reasonable valuations. Healthcare fits, and I stay bullish there - within life sciences and pharmaceuticals. These should benefit from some of the rotation, and they have over the past month.
Stock pick: Agilent
Agilent (A) is a life sciences company that makes chromatography and spectrometry machines. These machines help study chemicals for drug science. Local governments also use them for studies of municipal water and pollutants. It is close to an oligopoly, so the company has a strong path for growth and decent pricing power going forward.
Volatility and the sell-offs
The VIX was at 20.75. It had been a wild ride: up 36% over one month and 41% over three months. Last week people asked whether the sell-off was capitulation, and it did not feel like it. The VIX did not hit 30, 40, or 50. It was elevated but not like past panics. That was not capitulation; it was a few hedge funds with liquidations. There have been reports of mid-size and small-size hedge funds having a hard time, and the sell-off came from that. Expect more churning and rotation toward year-end.
What to do with tech
With gridlock in place, the market could drift higher, but you have to run your portfolio actively. On tech: if a name is still reasonably valued, you can keep owning it - a good company is a good company and you can hold through the swings. But watch valuation and concentration risk. Plain old risk management has been lost over the last couple of years. It is fine to make some sales when things get stretched. That discipline got lost because so many of these stocks only went up, and the strain is showing now in the semiconductor and AI trade.
