The largest bull in the market predicts the S&P 500 will rise another 7%, but warns that a popular trade won’t join in.
Wells Fargo Securities’ Chris Harvey recently downgraded software from neutral to underweight, stating that it was a busy trade. He based the decision on technical data and earnings fundamentals and high valuations.
“From a valuation standpoint, you’re paying about a 75% premium to the software market 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 homework piece,” Harvey said. “We just don’t think there are many opportunities in the short term.”
He finds the opposite true for media and entertainment.
“When we downgraded software, we upgraded media and entertainment,” Harvey says. “If we look at the media and entertainment space, you see better upward revisions, better growth opportunities. But you’re only paying a 15% premium.”
He upgraded his media and entertainment group’s rating from neutral to overweight, calling it his top market game.
“There’s a lot of money to spend. There’s still a lot of retained demand,” he said. “The media and entertainment space offers a much better opportunity to capitalize on that reopening game.
Not only does he see strong fundamentals and improving sentiment, Harvey argues that advertising is making a comeback in the diverse group, which includes everything from cable companies to big technology names.
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 opportunities and we want to get more aggressive on that cyclical trading,” Harvey added.
On Tuesday, Harvey raised his year-end S&P 500 price target from 3,850 to 4,825, a high on Wall Street. Despite his optimistic stance for 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 sort of hangover.
But for now, he’s firmly in the risk camp.
“We want more cyclical exposure,” Harvey said. “We want more exposure to what we consider to be high Covid beta games because we think the economy is moving forward.”
On Friday, the S&P 500 and tech-heavy Nasdaq closed at record highs. The S&P 500 closed above 4,500 for the first time. Meanwhile, the Dow is about half a percentage point from its record high.