September Surprises and Stock Market Opportunities
Introduction: A September to Remember
Welcome, listeners, to another episode of Market Insights Unlocked. I’m your host, and today we’re diving into a fascinating discussion straight from the floor of the New York Stock Exchange, where Diane King Hall recently interviewed Tom Hayes, Chairman and Managing Member at Great Hill Capital. September has historically been a bumpy month for markets—often dubbed the “September Effect” due to its tendency for declines. Yet, this year, the bears seem to be in hibernation. Despite early pessimism and warnings from Federal Reserve Chair Jay Powell about overvaluation in the markets, the S&P 500 is holding steady. But is the market truly overvalued, or are there hidden gems beneath the surface? Hayes offers a nuanced perspective, challenging the blanket narrative of an overpriced market and pointing to significant opportunities in small caps, energy, and specific stocks like Alibaba, Intel, and Comstock Resources. Let’s unpack this and explore what it means for investors like you.
Market Impact: Peeling Back the Onion
First, let’s set the stage with some historical context. September has long been a notorious month for stock market turbulence. Since 1928, the S&P 500 has averaged a decline of about 1% in September, making it the worst-performing month on record. This year, however, the expected downturn hasn’t materialized. Even with seasonal headwinds like “Sell Rosh Hashanah, Buy Yom Kippur”—a Wall Street adage based on historical underperformance during this period—the market has defied expectations, with the S&P 500 avoiding significant losses.
Jay Powell’s recent comments about market overvaluation have raised eyebrows, but Hayes pushes back with a critical insight: the S&P 500 isn’t a monolith. With the “Magnificent Seven” tech giants—think Apple, Microsoft, and Nvidia—comprising roughly 40% of the index’s weight, their high valuations skew the broader picture. Meanwhile, other segments like small caps and energy are trading at much lower multiples with strong growth potential. For instance, small caps are projected to see 35% earnings growth next year while trading at just 17 times earnings—a bargain compared to the S&P 500’s 22.5 times forward earnings. Energy, too, is at its lowest weighting in the S&P since the COVID lows, despite expected 17% earnings growth in 2025. Globally, this narrative of selective opportunity resonates as well. While U.S. tech stocks dominate headlines, emerging markets and cyclical sectors are showing signs of a catch-up trade, particularly as central banks worldwide, including the Fed, signal rate cuts that could ease borrowing costs and stimulate growth.
Sector Analysis: Where Opportunity Knocks
Let’s zoom in on the sectors and stocks Hayes highlights. Small caps are a standout for him, and for good reason. Historically, small caps thrive in post-rate-hike environments when the Fed pivots to cuts, as lower borrowing costs reduce solvency risks and allow these companies to refinance debt and invest in growth. Think back to the early 2000s, when the Russell 2000 outperformed large caps by a wide margin following the dot-com bust. Hayes acknowledges the challenge—many small caps aren’t profitable—but notes that profitable ones have significantly outperformed, and current conditions mirror those of past breakout periods.
Energy, particularly natural gas, is another focal point. With data center demand projected to surge 165% by 2030, per Goldman Sachs, and 60% of that demand powered by natural gas, companies like Comstock Resources are well-positioned. Comstock, trading near book value with vast unproved reserves, could be a multi-bagger over the next few years, especially given its strategic location near export terminals in the Haynesville Shale. This ties into the broader AI boom, as data centers fueling AI advancements require massive energy inputs—a trend also benefiting Hayes’ pick of Alibaba.
Speaking of Alibaba, Hayes calls it the “cheapest way to play AI in the world.” Despite past volatility and concerns over China’s regulatory environment, Alibaba’s fundamentals are compelling: $25 billion in free cash flow, $80 billion on the balance sheet, and leadership in e-commerce and cloud computing. With plans to ramp up AI spending—potentially exceeding $50 billion—and the launch of its Quen 3.0 Max model, Alibaba could see significant upside, with Hayes projecting a near-double in value over three years. Intel, too, is on his radar as an “uninvestable” stock turned opportunity. Backed by a $9 billion U.S. government investment and strategic partnerships with Nvidia, Intel’s role in meeting global chip demand could make it a multi-bagger from current levels.
Finally, Hayes touches on the consumer, the backbone of the U.S. economy. Despite bumpy job market data, retail sales remain robust, while consumer sentiment is at lows not seen since the Great Financial Crisis. Historically, such pessimism has been a contrarian buy signal—12 months after similar sentiment troughs, the S&P 500 has risen 24.1% on average. With $35 trillion in home equity trapped due to high rates, a Fed pivot could unleash this capital, spurring economic activity in housing (16% of GDP) and beyond.
Investor Advice: Navigating the Nuances
So, what should you, as an investor, do with this information? First, adopt a nuanced approach. Don’t just chase the Magnificent Seven or buy broad market indices at these valuations—Jay Powell’s caution isn’t baseless for those segments. Instead, look for laggards with strong fundamentals. Small cap ETFs like the iShares Russell 2000 ETF (IWM) could offer diversified exposure to this high-growth, low-multiple space, but be selective—focus on profitable companies to mitigate risk.
Second, consider energy as a covert AI play. Stocks like Comstock Resources offer exposure to natural gas demand tied to data center growth. If you’re risk-averse, look at broader energy ETFs like the Energy Select Sector SPDR Fund (XLE) to balance individual stock volatility. Third, for those with a stomach for international exposure, Alibaba presents a compelling case. Its valuation and AI initiatives make it a high-upside bet, though geopolitical risks remain—allocate cautiously and diversify.
Lastly, keep an eye on the consumer and housing. As rates decline, consumer spending and mobility could rebound, benefiting cyclical sectors. Monitor housing starts and consumer confidence data for early signals of this trend. For now, maintain a balanced portfolio—don’t overcommit to any single theme, and keep cash on hand to seize opportunities as they emerge. Use stop-loss orders to protect against unexpected downturns, especially in volatile names like Intel or Alibaba.
Conclusion: Early Days of a Broader Rally
As we wrap up, let’s reflect on Hayes’ key takeaway: we’re in the early days of a broader market participation story. While the Magnificent Seven have driven gains for years, the next phase could belong to small caps, energy, and undervalued giants like Alibaba and Intel. September’s resilience signals that the market isn’t as fragile as feared, and with the Fed likely to ease rates, the conditions for a catch-up trade are ripening. Globally, this could mean a rebalancing of capital flows toward undervalued sectors and regions, offering a counterweight to U.S. tech dominance.
Listeners, the market is a complex beast, but it rewards those who dig deeper. Look beyond the headlines of overvaluation and seek out the stories of growth and value. Whether you’re a seasoned investor or just starting, there’s opportunity in this nuanced landscape—be patient, be selective, and stay informed. That’s all for today’s episode of Market Insights Unlocked. Join me next time as we continue to decode the trends shaping our financial future. Until then, keep investing smartly.