3 Undervalued Stock Sectors to Invest In As AI Trading Slows: JPM

• JPMorgan Asset Management reports that three underinvested areas of the stock market have the potential to miss growth.
• These include the semiconductor, rail and shipping, and home appliances sectors, according to the company.
• Strategists say these could be great additions to the portfolio as AI stocks’ earnings growth begins to slow.

Investors are still caught up in the generative AI craze — but there are underserved pockets of the market that could deliver “coil-spring” returns, says JPMorgan Asset Management.

While the Magnificent Seven stocks — which include tech giants like Nvidia, Meta and Microsoft — posted a 50 percent year-over-year jump in earnings per share in the first quarter, the rest of the S&P 500 is expected to catch up.

JPMorgan predicts that by the fourth quarter of 2024, earnings growth for the remaining 493 companies in the S&P 500 will match that of the Magnificent Seven, a pattern illustrated in the chart below.

“Longer term, significant fiscal spending, particularly on infrastructure (such as the Inflation Reduction Act and the CHIPS and Science Act), combined with growing enthusiasm around generative AI, should provide a supportive backdrop for stronger secular growth going forward,” the strategists said. “Markets clearly have not fully factored in this forecast, as reflected in the narrow (and narrowing) nature of the stock rally.”

Investors looking for unrealized profits should focus on non-Mag 7 stocks that are “diminished” in valuation and that have not yet factored in earnings growth.

“These names could therefore function like ‘coil springs,’” the note added, highlighting three specific industries:

SemiconductorsJPMorgan says there are plenty of growth opportunities in the semi-truck segment beyond AI trading.

“Hard-hit sectors like personal electronics, communications and enterprise could soon rebound as demand rebounds from low levels left by the ‘over-order’ caused by the pandemic,” the company wrote.

Railway and parcels. These stocks are sure to rise due to the “unexpected resilience” of the U.S. economy and the growing need to transport materials. Automation in the industry is also expected to increase efficiency, which could boost growth.

Home improvement. Americans have put home renovations on hold, held back by high interest rates and the fact that many have already renovated their homes during the pandemic. But that trend is likely to reverse in the future, strategists say.

“As the average age of a home in the U.S. increases, the likelihood of significant maintenance costs increases. In addition, the backlog of jobs in older projects is shrinking as immigration has helped address labor shortages,” they said.

JPMorgan’s suggestions indicate a shift on Wall Street toward recommending diversification rather than continuing to chase Mag 7 yields. That’s been the case amid uncertainty surrounding the election and Fed rate cuts in the coming year. Some defensive holdings, such as energy and utility stocks, have posted above-average gains over the past year, with returns outpacing even top AI picks like Nvidia.