Growth names reaching an apex have inherent risks associated with them. But investors are still buying into “Magnificent Seven” names as the official start of summer fast approaches. However, there are alternate pathways to growth that includes one ETF from Invesco.
The prospect of rate cuts continue to fuel a risk-on sentiment. This is causing investors to continue rallying around artificial intelligence and names associated with AI technology. After stumbling to start the second quarter, the S&P 500 is resuming its upward trend, with tech stocks leading the way.
“Most of the S&P 500’s increased valuation stems from investors bidding up technology stocks, which have been fueled by optimism surrounding artificial intelligence,” a Barron’s article said.
However, certain household names could be exhibiting bubblelike valuations. As the capital markets get deeper into an election year, things could get volatile for these S&P 500 leaders.
“The so-called Magnificent Seven stocks — Nvidia, Apple, Amazon.com, Microsoft, Google parent Alphabet, Tesla, and Meta Platforms — are trading at 30.71 times their projected earnings in the next 12 months,” the article added.
Investors who are hesitant in allocating any more capital to Magnificent Seven stocks and the like due to potentially exorbitant valuations might be looking for alternatives. They may have the answer when looking at funds that employ a discernible screener that combines the trio of growth, quality and value. That can be found in the Invesco S&P 500 GARP ETF (SPGP ).
A Discerning Screener
SPGP tracks the S&P 500 Growth at a Reasonable Price Index. It looks for stocks with growth prospects that don’t come at lofty prices or names that eschew the aforementioned bubblelike valuations.
The index provider starts by searching the index for companies with strong growth characteristics. It accomplishes this by looking at a three-year EPS component as well as three-year sales per share growth. Next, 150 stocks get selected based on this growth criteria. They receive a quality/value composite score that looks at financial leverage ratios, return on equity, and price-to-earnings ratio.
Those 150 stocks selected get cut in half. The top 75 show the highest quality/value score. The result is a diversified portfolio exhibiting the highest growth, quality, and value factors. As such, investors won’t see Magnificent Seven names in its top 10 holdings. They’ll see stocks that have strong prospects for future growth.
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