On November 13, Morgan Stanley published an analysis highlighting potential risks to the “Trump trade,” which refers to market optimism following Donald Trump’s decisive victory in the 2024 U.S. presidential election.
The investors poured into small-cap stocks, financials, and cryptocurrencies, expecting lower taxes and deregulation. However, bond markets signaled caution, with 10-year Treasury yields rising sharply. Concerns about unfunded tax cuts and swelling U.S. debt weighed on sentiment in fixed-income markets, and the stronger U.S. dollar put pressure on emerging market currencies.
Despite the current market momentum, the bank’s Global Investment Committee advises investors to approach these trends cautiously as 2025 approaches. They cite three primary risks to the sustainability of this rally.
First, equity valuations are highly stretched. The report points out that higher interest rates are increasing borrowing costs and could weigh on corporate profitability. Inflation-adjusted 10-year Treasury yields have risen to about 2%, historically associated with lower stock price-to-earnings ratios. Currently, this multiple sits at 23x, far above historical norms.
Second, corporate earnings targets for 2025 are ambitious and may be difficult to achieve. Forecasts project profit growth of 15%, which seems overly optimistic given current single-digit earnings growth and weak productivity improvements. While some sectors, such as traditional energy and financials, might benefit from regulatory clarity under Trump’s leadership, headwinds such as rising borrowing costs and the stronger dollar could challenge multinational corporations. Moreover, potential tariffs might increase production costs, putting additional pressure on manufacturers.
Finally, policy timing poses significant risks. The Trump administration’s policy sequencing will be critical. While measures such as deregulation and tax cuts could stimulate growth, inflationary policies such as tariffs or immigration restrictions could offset these benefits. Such actions may raise consumer prices, slow labor-force growth, and disrupt key industries, including agribusiness and services.
Given these risks, the bank advises investors to consider taking profits in high-performing stocks and offsetting tax liabilities by selling underperforming securities. They see potential opportunities in large-cap value, mid-cap growth, and emerging markets, where currency volatility has created attractive entry points.
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Oaktree Capital’s Howard Marks on Investing Amid Chaos
In an interview with Bloomberg on November 20, Howard Marks, Co-Chair of Oaktree Capital Management, shared his insights on navigating the uncertainties of the global market and investment strategies amidst geopolitical and economic turmoil.
Marks emphasized the inherent unpredictability of markets, cautioning against overreacting to short-term events such as geopolitical tensions, shifts in U.S. policy, or macroeconomic changes. Instead, he advocated for a disciplined, bottom-up approach to investing that focuses on intrinsic value and the fundamental performance of individual companies.
Marks addressed the high valuations in U.S. equity markets, noting that while prices might be elevated relative to historical norms, he does not view them as prohibitively overpriced but rather highly priced.
On geopolitical developments, including former President Trump’s rhetoric and potential policy impacts, Marks stressed the difficulty of predicting how events might unfold or how markets might respond. He highlighted the importance of maintaining a long-term perspective rather than attempting to time markets based on speculation. He pointed to historical instances where predictions of major global events could have led to costly investment mistakes.
The financial landscape is currently being shaped by shifting policies, evolving market trends, and global uncertainties. Investors should proceed with caution, focus on long-term strategies, and adopt disciplined decision-making to navigate potential risks. With that in context, let’s take a look at the 12 best stocks to invest in for the next 3 months.
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Our Methodology
To compile our list of the 12 best stocks to invest in for the next 3 months, we used Insider Monkey’s Hedge Fund database to rank the 12 stocks that are the most popular among elite money managers, as of Q3 2024. The list is sorted in ascending order of their hedge fund sentiment.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
12 Best Stocks to Invest in for the Next 3 Months
12. Adobe Inc. (NASDAQ:ADBE)
No. of Hedge Funds: 123
Adobe Inc. (NASDAQ:ADBE) is a leading global software company known for its innovative digital media solutions. The company is known for products like Photoshop, Acrobat, and Adobe Creative Cloud, which are widely used in creative industries and businesses worldwide.
On October 14, Adobe Inc. (NASDAQ:ADBE) announced the beta availability of new features in Premiere Pro, a video editing software, at the Adobe MAX conference in Miami Beach. The new features are powered by the Firefly Video Model, a generative AI technology designed to help video professionals with their work. According to Ashley Still, senior vice president of digital media at Adobe Inc. (NASDAQ:ADBE), the Firefly Video Model is expected to revolutionize video editing and empower professionals to work more efficiently and creatively.
Adobe Inc.’s (NASDAQ:ADBE) AI advancements, such as AI Assistant in Acrobat and Reader, are transforming user experiences and driving significant engagement and growth. Furthermore, the company’s focus on AI-driven growth has led to the development of new products and services, such as Adobe Firefly, which allows creators to generate images and videos from text. Adobe Inc.’s (NASDAQ:ADBE) AI-powered tools are also being used to edit visuals, extend the length of videos or scenes, and provide users with more creative freedom.
11. Broadcom Inc. (NASDAQ:AVGO)
No. of Hedge Funds: 128
Broadcom Inc. (NASDAQ:AVGO) is a leading designer, developer, and supplier of semiconductors and infrastructure software solutions. The company’s diverse product portfolio spans sectors like data centers, networking, broadband, and wireless communication. Broadcom Inc.’s (NASDAQ:AVGO) cybersecurity offerings include the Symantec Enterprise Cloud platform and a suite of solutions for payment, mainframe, network, endpoint, and identity security.
On September 5, Broadcom Inc. (NASDAQ:AVGO) reported financial results for its third quarter which ended August 4. The company reported a 47% year-over-year increase in revenue to $13.1 billion. This growth was driven by strong AI-related revenue, VMware bookings, and robust performance in non-AI semiconductor segments. Looking ahead to Q4, Broadcom Inc. (NASDAQ:AVGO) anticipates revenue of approximately $14.0 billion
On November 5, Broadcom Inc. (NASDAQ:AVGO) announced significant advancements in its VeloCloud product portfolio, aimed at supporting the growing adoption of AI and non-AI workloads in enterprises. The company unveiled VeloRAIN, a robust AI networking architecture that leverages AI and machine learning to enhance the performance and security of distributed AI workloads.
As part of this announcement, Broadcom Inc. (NASDAQ:AVGO) also introduced the VeloCloud Edge 4100 and 5100 appliances, high-end AI-ready edge devices that can scale up to 100Gbps for large enterprises and complex use cases. These appliances are designed to support the increasing demand for AI-driven applications and workloads in various industries, including manufacturing, retail, and telecommunication.
The company also launched the Titan program, a new partner program for VeloCloud Managed Service Providers (MSPs). The Titan program aims to help MSPs grow their businesses as their enterprise customers increasingly adopt AI solutions. The program is part of the company’s effort to support the growing demand for AI-driven applications and workloads.
