N※N

Show Stocks and Investing Publications

This veteran stock investor has seen enough bull markets to be worried now.

Veteran Strategist Warns of Tariff-Driven Market Correction, But Remains Bullish on Big Tech and AI Leaders

In the ever-volatile world of financial markets, seasoned investors often look to historical patterns and economic indicators to navigate uncertainty. Jim Stack, the founder and president of InvesTech Research, a firm renowned for its market analysis and newsletter services, has recently voiced significant concerns about the potential for a tariff-fueled market correction. With over four decades of experience in the investment arena, Stack's insights carry weight, especially as the U.S. political landscape heats up with discussions around trade policies. Yet, even amid these worries, Stack maintains an optimistic outlook on select big tech and artificial intelligence (AI) stocks, viewing them as resilient pillars in an otherwise precarious environment.

Stack's primary apprehension stems from the specter of escalating tariffs, particularly in the context of a possible return to power by former President Donald Trump. Trump has been vocal about imposing broad tariffs on imports, including a proposed 60% levy on Chinese goods and up to 20% on products from other countries. Such measures, Stack argues, could ignite inflationary pressures and disrupt global supply chains, echoing the trade wars of 2018-2019 that rattled markets. He draws parallels to historical episodes where protectionist policies led to economic slowdowns, such as the Smoot-Hawley Tariff Act of 1930, which exacerbated the Great Depression. In Stack's view, these tariffs wouldn't just affect international trade; they could cascade into higher consumer prices, squeezed corporate margins, and a broader economic contraction. This scenario, he warns, might trigger a market correction of 10% or more, potentially derailing the bull market that has been buoyed by post-pandemic recovery and technological innovation.

The current market backdrop amplifies these concerns. The S&P 500 has surged to record highs, driven by enthusiasm for AI and robust corporate earnings, but valuations are stretched. Stack points to metrics like the price-to-earnings (P/E) ratio, which for many tech giants hovers well above historical averages. He notes that the market's forward P/E is around 21, compared to a long-term average of about 15-16, suggesting overvaluation that leaves little room for error. Moreover, with the Federal Reserve signaling a cautious approach to interest rate cuts amid persistent inflation, any tariff-induced price spikes could force the Fed to maintain higher rates longer, further pressuring equities. Stack also highlights the concentration risk in the market, where a handful of mega-cap tech stocks—the so-called "Magnificent Seven"—account for a disproportionate share of gains. If tariffs disrupt these companies' global operations, the ripple effects could be profound.

Despite these headwinds, Stack isn't advocating a full retreat from the market. Instead, he emphasizes a selective approach, focusing on sectors and companies that he believes are insulated from tariff impacts or poised to benefit from long-term trends. At the forefront of his recommendations are big tech and AI stocks, which he sees as "defensive growth" plays in an uncertain environment. These companies, with their strong balance sheets, innovative pipelines, and dominant market positions, are less vulnerable to short-term economic disruptions and more likely to thrive regardless of trade policy shifts.

Leading the pack in Stack's favored list is Nvidia Corp. (NVDA), the undisputed king of AI chipmaking. Nvidia's graphics processing units (GPUs) are essential for training and running AI models, powering everything from data centers to autonomous vehicles. Stack praises Nvidia's explosive growth, noting that its revenue has skyrocketed amid the AI boom, with the company reporting triple-digit year-over-year increases in recent quarters. He argues that even if tariffs raise costs for imported components, Nvidia's pricing power and technological moat will allow it to pass on expenses without losing market share. Furthermore, the global demand for AI infrastructure is insatiable, driven by tech giants like Microsoft and Amazon, ensuring Nvidia's relevance far beyond any single election cycle. Stack compares Nvidia's position to that of Intel during the personal computer revolution, suggesting it could deliver multi-year returns for patient investors.

Another top pick is Microsoft Corp. (MSFT), which Stack views as a cornerstone of the AI ecosystem through its Azure cloud platform and investments in OpenAI. Microsoft's integration of AI into its productivity tools, such as Copilot for Office, positions it to capture value from the widespread adoption of generative AI. Stack highlights Microsoft's diversified revenue streams, including software, cloud services, and gaming, which provide a buffer against economic volatility. He notes that while tariffs might affect hardware supply chains, Microsoft's software-heavy business model minimizes direct exposure. In fact, Stack believes Microsoft's AI initiatives could accelerate productivity gains across industries, potentially offsetting broader economic slowdowns caused by trade tensions.

Stack also expresses enthusiasm for Alphabet Inc. (GOOG), Google's parent company, for its leadership in AI research and applications. Through tools like Gemini and its vast data resources, Alphabet is at the vanguard of AI innovation. Stack points out that Alphabet's advertising-driven revenue model, while sensitive to economic cycles, benefits from AI enhancements that improve ad targeting and efficiency. He argues that any tariff-related disruptions to global trade would likely increase the need for digital solutions, boosting demand for Alphabet's services. Similarly, Amazon.com Inc. (AMZN) earns Stack's nod, not just for its e-commerce dominance but for Amazon Web Services (AWS), the world's leading cloud provider. AWS's role in hosting AI workloads makes it a critical enabler of the technology's growth, and Stack sees Amazon's logistics prowess as adaptable to tariff challenges, potentially even gaining from onshoring trends.

Beyond these tech titans, Stack mentions other AI-related plays like Broadcom Inc. (AVGO), a key supplier of semiconductors and networking equipment essential for AI data centers. He appreciates Broadcom's recent acquisition of VMware, which expands its software capabilities and diversifies its portfolio. Stack also likes Applied Materials Inc. (AMAT), a leader in semiconductor manufacturing equipment, as it stands to benefit from the global push to build more chip fabrication plants, partly in response to supply chain vulnerabilities exposed by tariffs and geopolitical tensions.

To contextualize his strategy, Stack draws on lessons from past market cycles. He recalls the dot-com bubble of the late 1990s, where overhyped tech stocks crashed, but true innovators like Microsoft and Cisco emerged stronger. Similarly, during the 2008 financial crisis, companies with solid fundamentals weathered the storm. Stack advises investors to focus on quality over quantity, prioritizing firms with low debt, high free cash flow, and sustainable competitive advantages. He cautions against chasing momentum in speculative AI startups, instead favoring established players with proven track records.

In terms of portfolio allocation, Stack suggests maintaining a balanced approach: allocating 60-70% to equities, with a heavy tilt toward tech and AI, while keeping 20-30% in cash or short-term bonds as a hedge against corrections. He recommends dollar-cost averaging into favored stocks during dips, viewing any tariff-induced selloffs as buying opportunities. Stack also stresses the importance of monitoring economic indicators like the ISM Manufacturing Index and consumer confidence surveys, which could signal the onset of a downturn.

Looking ahead, Stack acknowledges the uncertainty surrounding the 2024 U.S. presidential election and its implications for trade policy. If Trump wins and implements aggressive tariffs, Stack predicts a short-term market shock, possibly a 15-20% pullback in the S&P 500. However, he believes the underlying strength of the U.S. economy, coupled with AI's transformative potential, will drive a recovery. Even under a Biden administration, which has its own protectionist leanings, Stack sees AI as a secular growth driver transcending politics.

In summary, while Jim Stack's warnings about a tariff-fueled correction paint a cautionary picture, his endorsement of big tech and AI stocks offers a roadmap for navigating turbulence. By betting on innovation and resilience, investors can position themselves for long-term success, turning potential pitfalls into opportunities. As markets evolve, Stack's blend of prudence and optimism serves as a timely reminder that in investing, foresight and selectivity are key to enduring prosperity. (Word count: 1,248)

Read the Full MarketWatch Article at:
[ https://www.marketwatch.com/story/a-tariff-fueled-market-correction-worries-this-veteran-strategist-but-he-still-likes-these-big-tech-and-ai-stocks-722ed24f ]