Where Tech Investors Should Look for Their Next Hypergrowth Play By Michael Salvatore, Editor, TradeSmith Daily We’re now at a point where if I mention the recent bout of volatility in tech stocks, you have to ask, “which one?” August started out with the third-highest volatility surge on record. And now September has started out the seasonally weak period with another flush for the big tech giants. If you’ve been reading TradeSmith Daily, you saw this coming. We’ve been warning for months that the stock market is due for continued volatility just based on historical data. But just as important is what could come once the dust has settled. And for that, our friend Luke Lango has some thoughts. Luke is senior analyst at our corporate partner InvestorPlace and an expert on the tech sector. He’s preparing his readers for volatility in tech just like we are. But he’s also showing them how we’re 11 days away from a massive reversal trade that will catch many on Wall Street off guard. I caught up with Luke for an audio interview which we’ve transcribed below that goes over the situation. Read on to learn more…
Michael Salvatore, Editor, TradeSmith Daily: Luke, last week kicked off with a serious stumble in the big tech stocks yet again. Nvidia, for example, is down more than 16% over the last 5 trading days (as we’re recording on Thursday morning.) What do you make of this price action, and what should our readers do to stay ahead of it? Luke Lango, Senior Investment Analyst, InvestorPlace: The recent choppiness in tech markets is just that – choppiness. Nothing more. Stocks don't go up in straight lines. Not even hypergrowth AI stocks supported by very strong growth fundamentals. And make no mistake. Those stocks – Nvidia, Microsoft, Apple, Amazon, Meta – are supported by exceptional growth fundamentals. They're investing big in AI and, as a result, they’re creating new AI products and services that are adding earnings growth firepower. Michael: So, you’re impressed by what you’re seeing from those five companies on the AI front? Any particular ones pulling ahead of the group? Luke: All of them are crushing it, really. Nvidia is launching new AI chips and is looking at 120% EPS growth this year and over 40% EPS growth next year. Microsoft continues to innovatively deploy AI throughout its Office suite to make employees more productive. They're selling a lot of those AI tools to enterprises, and as a result, Microsoft is looking at 12% EPS growth this year and 16% EPS growth next year. Apple is launching the first AI iPhone with Apple Intelligence. They're going to have a great year ahead. The Street's looking for about 10% EPS growth next year – Apple's best EPS growth rate ex-COVID since 2018. Amazon is making big moves with Anthropic and also using AI very smartly in product recommendations and logistics right now. They're looking at 65% EPS growth this year and almost 25% growth next year. Meta has an awesome open-source LLM in addition to absolutely killing it with AI-powered content feeds and targeted ads. They're looking at 44% EPS growth this year and 15% next year. So, these five companies – they're absolutely killing it right now with their AI power moves and it is driving supercharged EPS growth. And as go profits, so go stocks. Michael: Absolutely. Luke: Right. So, that’s why I say right now, all we're seeing is a short-term valuation and sentiment correction in these stocks from overly euphoric levels. The dust will settle soon. Once it does, buy those dips. Michael: There’s also been a lot of talk about a recession finally manifesting after years of the economy dodging it. That would naturally have an impact on tech and AI along with everything else. So, what do you think about that – will we finally get one?
Luke: No recession. Not yet, at least. Not in 2024. Not in 2025. And most likely not in 2026. It’s tough to say anything with too much confidence beyond that, but I don't see any recession in the next 12 to 24 months. The really important thing to understand here is that while the economy is inarguably slowing, it is slowing because of high interest rates, and those rates are now going to come down rapidly over the next year. Think about where the economy is feeling it right now. Housing. Autos. Commercial real estate. Travel. Construction. Remodeling. Lending. Those are all parts of the economy acutely sensitive to interest rates, and they've all stalled out because we just went through the fastest and biggest rate-hiking cycle in modern history. So, the economy has slowed because of high rates. That means we know how to heal the economy: Lower rates. Luckily for us, lower rates are coming. The market is pricing in 100% odds that we get the first cut in less than two weeks, and it’s also pricing in about 10 rate cuts over the next 10 meetings into summer 2025. Michael: Do you agree with that assessment? Luke: I do. I think that's exactly what's going to happen, because inflation is back under control, and that was the Fed’s goal. Real-time estimates for the PCE inflation rate – which is the Fed's preferred inflation rate – sit around 2.1% for September. That means inflation has fallen back to the Fed's 2% target, which means they shouldn't (and likely won't) have any reservation when it comes to cutting rates over the next year. They're going to cut liberally and rapidly. So, I agree we're going to get 10 cuts over the next year. Those 10 cuts are going to collectively re-energize the economy and, instead of getting a recession over the next year, we're going to see the economy meaningfully restrengthen. I see an economic boom – not a bust – in 2025. Michael: Good to hear. In the meantime, you’ve talked about a rotation happening right now, specifically out of large-cap tech and into smaller, lesser known names. Can you explain to our audience why this is happening and if it’s set to continue? Luke: So, the Magnificent 7 has dominated markets all year long and really ever since this bull market started in early 2023. But that really changed around the Fourth of July holiday weekend this year. Keep in mind that from early 2023 to early July 2024, the Mag 7 stocks rose 145% while the S&P 493 (ex the Mag 7) rose just 20%. But since early July 2024, though, the Mag 7 stocks are down 10% while the S&P 493 is up 5%. So, we are objectively already seeing a broadening in the stock market rally. We think that is set to continue, accelerated by consistent rate cuts over the next year. Michael: And it’s the smaller stocks that are more rate-sensitive. Luke: Little stocks care a lot more about rates than big tech. That's because big stocks tend to have huge cash flows and huge balance sheets, so they don't really care about the cost of money. They already have their money! They don't need capital markets. Little stocks, though, don't have huge cash flows or huge balance sheets. They need the capital markets. They are heavily reliant on the cost of capital. So, in 2022 and ’23, we had a rapidly rising cost of capital, and that disproportionally hit little stocks. On the other side of that, a rapidly falling cost of capital in 2024 and ‘25 will disproportionally benefit little stocks. Hence why we like the broadening thesis for the next 12 months. Michael: That’s actually a great segue into the next question I had for you. I understand you’re preparing to publish three trading ideas on stocks set to break out in the next couple weeks. So, what is the catalyst that leads you to these stocks and would cause them to break out, even with all this volatility we’re seeing everywhere else in the market? Luke: Yeah – four trade ideas, actually. The first of which I’m putting into my upcoming presentation on Wednesday, which anyone can join if they’d like. Michael: I see here it’s called The Great Tech Reversal of 2024? Luke: That’s the one. And here's the set-up. Number one, rate cuts are coming. They'll start to restrengthen the economy starting in two weeks. Those rate cuts will keep coming for the next 12 months. They'll keep restrengthening the economy for the next 12 months, too. Then number two, we're hearing nothing but euphoric things from AI companies about the amount of money being invested in the AI boom. So, over the next 12 months, you're going to get a restrengthening economy plus massive AI investment tailwinds. That's very similar to the situation we had in 1998, when the Fed cut rates in late 1998 to resuscitate a struggling economy. Throughout 1999, the economy meaningfully restrengthened. And that coupled with massive internet investment tailwinds to create one of the best periods of tech investing ever. That was the pinnacle of the dot-com boom. I think we're heading into that pinnacle for the AI boom over the next 12-24 months. So then when you combine the rate cuts and the massive investment in building out AI, I think we're going to see a lot of the smaller stocks there start to break out in a big way over the next 12-24 months. It will be the perfect market environment for that. And I want to get prepared for this, because like I said, I think it all starts in less than two weeks once the Fed officially starts their rate-cutting cycle. Michael: It’s all about those rate cuts. Luke: Yes. That'll be the start of what I think could be one of the best 12-month stretches for stocks going into late 2025. Michael: I can’t wait to see how it plays out. Thanks for chatting today, Luke. Luke: Anytime – thanks for having me.
It’s interesting what Luke had to say here about Nvidia and how its earnings are still set to grow double-digits next year – but smaller companies are the best play for investors right now. Apparently Ken Griffin of Citadel dumped 9.2 million shares of NVDA in Q2, as we learned in their August filings with the SEC. That’s 79% of Citadel’s stake in NVDA. And instead, Citadel is buying way smaller AI stocks. From what Luke shared with us today, that’s just the beginning of a massive capital rotation from big, overpriced stocks… to smaller companies that have more upside potential – and are still cheap. Which is why this coming Wednesday he’s hosting his online strategy session to help you prepare. The event is at 8 p.m. Eastern, and it’s free to the public; click here for more details and to save your spot at The Great Tech Reversal event. To your health and wealth,  Michael Salvatore
Editor, TradeSmith | 
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