20 Stocks to Buy to Outperform As This Market Rally Weakens: BMO

Brian Belski of BMO Capital Markets was one of the market’s most bullish strategists heading into 2024. The chief investment strategist thought the S&P 500 would rise about 7% this year to 5,100 — a level that the index topped on March 1. It’s now just below its all-time high of 5,175.

But unlike many of his peers, Belski refuses to rethink his year-end price target for the S&P 500.

Instead, the strategy chief says stocks will stagnate from current levels while volatility surges.

“We do not view the current pace of US stock market gains as sustainable over the coming months,” Belski wrote in a mid-March note. He added: “We believe it will be difficult for US stocks to finish the year at significantly higher-than-current levels.”

Investors will be disappointed by the Federal Reserve’s refusal to reduce interest rates in the face of persistent inflation, Belski predicted. He noted that there’s a serious disconnect between how many rate cuts the market is calling for and how many the Fed is forecasting.

Bank on better breadth

However, Belski added that booking gains by selling stocks entirely would be a big mistake.

“We caution investors not to confuse our indifference regarding market direction as a recommendation to avoid adding exposure to US stocks,” Belski wrote. “Instead, our work shows that plenty of investment opportunities still exist in this type of market environment.”

Market breadth is markedly better in the last few months, according to BMO Capital Markets. For most of 2023, US stocks were disproportionately driven by growth stocks, specifically a handful of top performers. But since the fall lows, companies across all categories have rallied.

“While growth is still leading performance, that gap has closed substantially as other areas of the market started to ‘participate’ more meaningfully,” Belski wrote.

A greater number of stocks has bested the S&P 500 since late October, Belski noted. Another promising sign for breadth is that the largest stocks seem to have less sway over the market.

20 stocks to buy now

If improved breadth is here to stay, as Belski expects, stock-pickers should celebrate — even in a weaker market backdrop.

A wider variety of sectors showing strength leads to better opportunities for active investors, as does unusually wide dispersions in earnings growth and forward earnings ratios. When the gaps between fundamentals are bigger, it’s easier to discern which companies are winners or losers.

History shows that stocks can still surge during flat markets, Belski noted. Firms that fare best in this setting are often those that could be classified as growth-at-a-reasonable-price (GARP), quality, or momentum names, the strategy chief wrote. Cheap valuations are also a plus.

On a risk-adjusted basis, the quality and value groups tend to thrive most, Belski wrote.