These 3 overlooked areas of the stock market have ‘coiled spring’ upside, JPMorgan says

iStock; Rebecca Zisser/BI

Unrealized upside exists in three underbought areas of the stock market, JPMorgan Asset Management says.

They include the semiconductor, rail and parcel, and home improvement sectors, according to the firm.

Those could be great portfolio adds as earnings growth in AI stocks starts to slow, strategists said.

Investors are still overtaken by the frenzy for generative AI — but there are underappreciated areas of the market that could offer gains like “coiled springs,” according to JPMorgan Asset Management.

While the Magnificent Seven stocks — which include tech giants like Nvidia, Meta, and Microsoft — saw 50% annualized earnings-per-share growth in the first quarter, the rest of the S&P 500 is due to catch up.

By the fourth quarter of 2024, JPMorgan expects earnings expansion for the other 493 S&P 500 stocks to match that of the Magnificent 7, a dynamic shown in the chart below.

Earnings growth is expected to climb in the S&P 500, barring the Magnificent Seven stocks.JPMorgan Asset Management

“Taking a longer-term view, significant fiscal spending, particularly on infrastructure (such as the Inflation Reduction Act and the CHIPS and Science Act), coupled with growing enthusiasm around generative Artificial Intelligence, should provide an accommodative backdrop for stronger secular growth moving forward,” strategists said. “Markets don’t seem to have fully priced in this prognosis, reflected in the narrow (and narrowing) nature of the equity market rally.”

Investors looking for unrealized upside would be well-served to seek non-Mag 7 stocks with “depressed” valuations that aren’t yet pricing in the earnings-growth catchup.

“These names could therefore function like ‘coiled springs,'” the note added, highlighting three particular industries:

Semiconductors. JPMorgan says there is plenty of opportunity in semis outside of the AI trade.

“Depressed areas like personal electronics, communications and enterprise, may soon bounce back as demand is reinvigorated off low levels left behind by pandemic ‘over-ordering,'” the firm wrote.

Rail and parcel….

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