The biggest bull in the market predicts the S&P 500 will rise another 7% but warns that a popular trade will fail.
Wells Fargo Securities’s Chris Harvey recently reduced the software underweight from neutral and declared it an overcrowded trade. He based the decision on technical data and profit bases as well as high ratings.
“From a valuation perspective, you’re paying the software market about 75% premium, and that’s too rich,” the company’s head of equity strategy told CNBC’s “Trading Nation” on Friday.
The Dow Jones US Software Index is up 28% in the past five months.
“It’s a home game,” said Harvey. “We just don’t think there are many options in the short term.”
The opposite is the case for media and entertainment.
“When we downgraded the software, we updated the media and entertainment,” said Harvey. “If we look at the media and entertainment, you see better revisions, better opportunities for growth. But you only pay a 15% premium.”
He raised his media and entertainment group rating from neutral to overweight and listed it as his top market game.
“A lot of money has to be spent. There is still a lot of catching up to do,” he said. “The media and entertainment sector offers a much better opportunity to take advantage of this reopening game.
In addition to seeing strong fundamentals and improving sentiment, Harvey claims that advertising is making a comeback in the diverse group that includes everything from cable companies and big tech companies.
The S&P 500 Media & Entertainment Index is up 4% last month and 34% so far this year.
“We want to be more aggressive”
“There are still plenty of opportunities and we want to get more aggressive on this cyclical trade,” added Harvey.
Last Tuesday, Harvey raised his S&P 500 year-end price target from 3,850 to 4,825, a Wall Street high. Despite his bullish stance over the last four months of the year, he gave a less optimistic outlook for 2022 – with a target of 4,715. Harvey believes the record year will be followed by some kind of hangover.
But right now he’s firmly in the camp of risk taking.
“We want more cyclical exposure,” said Harvey. “We want more engagement in what we consider high covid beta games because we believe the economy will move forward.”
The S&P 500 and tech-heavy Nasdaq closed at all-time highs on Friday. The S&P 500 closed above 4,500 for the first time. Meanwhile, the Dow is about half a percentage point off its all-time high.
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