With volatility ahead, invest in the Mag 7: Portfolio manager

Market volatility spurred by recession fears rocked the tech sector last week, causing large-cap names to come under pressure. Aptus Capital Advisors portfolio manager David Wagner joins Wealth! to discuss the state of the tech industry sa recession fears circulate.

If July's Consumer Price Index (CPI) comes in higher than expected and interest rates start to come down, Wagner argues that the Magnificent Seven will "continue to be that funding mechanism, much like what we saw in the middle of July."

"You saw that capital flow from the Magnificent Seven to some of the smaller-cap cohorts to more of the real estate investment trust areas, the utilities, and even some of the more consumer cyclical and the consumer discretionary area," he says. Wagner notes that the flow of capital will remain with the Magnificent Seven because "there's so much resiliency, there's so much pricing in elasticity that a lot of those companies have."

While the safe move 10 years ago was to invest in staples like utilities, Wagner believes it is now in AI tech names: "The amount of profit margin and operating leverage that a lot of these Magnificent Seven companies have, that's where the flow of capital is going to go if investors are looking for safety. And so if you think that there's going to be volatility in the market, not just here in the near term, but over say the next three to four months, I'd be putting my capital in the Mag Seven."

For more expert insight and the latest market action, click here to watch this full episode of Wealth!

This post was written by Melanie Riehl

Video transcript

Where would volatility net out for some of the larger cap tech names out there?

Those that have been darlings in the broader A I theme.

You know, if, if we get a better than anticipated, you know, CP I report here, I do believe rates will come down and I think those magnificent seven names, they're going to continue to be that funding mechanism much like what we saw in the middle of July.

And you saw that capital flow from the magnificent seven to some of the smaller cap cohorts to more of the real estate investment trust areas, the, the utilities and even some of the, the more consumer cyclical in the consumer discretionary area.

So that's what I would probably expect if we see, uh you know, worse off.

So a higher than anticipated CP I report, I do think that, you know, the flow of capital is going to remain with the magnificent seven because there's so much resiliency, there's so much pricing in elasticity that a lot of those companies have.

And that's the new flight to safety.

The flight to safety 10 years ago was the staples was the utilities.

But, you know, in this new era of investing in A I and you know, the amount of profit margin operating leverage that a lot of these magnificent set of companies have.

That's where the flow of capital to go if investors are looking for safety.

And so if you think that there's going to be volatility in the market, not just here in the near term, but over say the next three or four months, I'd be putting my capital in the mag seven and II.

I actually don't think that's a consensus call.

I think that's kind of the anti consensus call, which makes me probably a little bit more even convicted in that thesis just last thing while we have you here, David.

Um As we're thinking through the earnings calls that have already taken place, I have one note in my inbox.

Uh and it's forwarded from this, the chief economist at Apollo.

Uh and, and all of this looking at the amount of mentions on recessions and earnings calls here and companies are talking less and less about recession on earnings calls looking at and charting even back to 2006 at this juncture.

What does that signal to you about how concerned companies are and what investors should expect?

Specially as it relates to what they're saying about their financial performance even amid the macroeconomic environment where they're not talking as much about recession on these calls.

Yeah, bro, that's great anecdotal evidence.

I I would like to see where that figure stands, not just at the end of this week, but maybe at the end of like 23 weeks from now because we're starting to see, especially this week, the more cyclical discretionary companies reporting you have Home Depot, you have Walmart, you have Lowe's this week, next week.

In the following week, you're gonna get a lot more of the smaller capitalization companies that are a little bit more tied to the cyclical aspects of the US economy itself.

I'd kind of like to see that data come through.

Um you know, in the next three weeks because right now the market is so tied to consumer spending and that's where a lot of people are seeing cracks in the macroeconomic data is on the consumer spending side of things.

So I don't want to hear that management commentary if they're starting to see cracks, depending whether it's on a higher end cohorts of the income distribution or on the lower end.

David, always a pleasure to speak with you.

Great to check in David Wagner who is the AIS capital advisors, portfolio manager.

Thanks there.