Nvidia and Alphabet’s Attractive Prices Could Be October’s Stock Market Surprise. Here’s Why

By Michael Brush

Tech giants look cheap on earnings growth, while US stocks as a whole may resist seasonal weakness

Three weeks into the dreaded September-October period, when U.S. stocks often fall, there hasn’t been a major pullback. At least not yet.

Or probably not at all. Any market weakness that develops is a buying opportunity, and here are a few reasons why:

1. Investor sentiment is bullish, but not overly so: Since the stock market fools most people most of the time, we would need to see excessive investor optimism to prepare the market for a sharp decline. But that is not the case.

I track about a dozen sentiment indicators, but if you only track one, make it the Investors Intelligence Bull/Bear. This one is on a scale of 0.5 to five. Anything above four is a red flag for me, and I’m overly optimistic. The most recent reading, from 9/11, was 1.92. To me, anything below two suggests the market is a buy because sentiment is weak (in a contrarian sense).

Another closely watched indicator, the Bank of America Sell Side Indicator, tracks the suggested stock allocation among sell-side strategists and has been in neutral territory lately. Its latest reading, at 56.2% in stocks, suggests an 11.5% return for the S&P 500 SPX over the next 12 months, says B of A strategist Savita Subramanian. In the meantime, the survey shows that fund managers are cautious. They are selling economically sensitive sectors like energy, materials and consumer discretionary, which do well when the economy is strong.

2. Recession is unlikely: The U.S. economy is not expected to go into recession anytime soon. The rising unemployment rate is a false signal. The unemployment rate is the number of people working as a percentage of the labor force. By definition, it rises as more unemployed people (defined as those actively seeking work) join the labor force, even when the labor market remains healthy.

That’s what’s happening now. Companies are still adding workers. But unemployment is rising because the labor force is growing faster than job creation, notes Jim Paulsen, who publishes strategic commentary at Paulsen Perspective on Substack.

Read: This Unemployment Rate You’ve Never Heard Of Is Warning of a Recession

3. Consumer spending is strong: Goldman Sachs economist Jan Hatzius tracks executive sentiment toward consumers on earnings calls. His system pegged consumer sentiment at its highest level in 2022 in the second quarter. He expects a “solid” 2.4% increase in consumer spending in the second half of 2024.

4. Stocks hold up better in September and October when conditions are right: Two stocks that look attractive in this environment are Nvidia (NVDA) and Alphabet (GOOGL). These stocks even look cheap on the price-to-earnings-to-growth (PEG) ratio, popularized by famed investor Peter Lynch. This metric weighs a stock’s projected P/E against its long-term earnings growth estimate. For growth stocks, a PEG ratio below 1.5 indicates cheapness. Nvidia has a PEG ratio of 0.66; Alphabet trades at a PEG ratio of 0.92.

Helping the broader market in September and October this year is that U.S. stocks tend to do much better in those two months, when interest rates fall and money supply increases, Paulsen says. Stocks also tend to do better in September in election years, when the U.S. stock market does no worse than average. Paulsen’s chart below shows the difference in performance:

Michael Brush is a MarketWatch columnist. At the time of publication, he owned NVDA and GOOGL. Brush suggested NVDA and GOOGL in his stock newsletter Brush Up on Stocks. Follow him on X @mbrushstocks

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-Michael Brush

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09-21-24 1059ET