The 20% drop in Nvidia stock is actually a good sign for the market, the strategist says. Here’s why

Tony Roth, Chief Investment Officer for Wilmington Trust Investment Advisors (MTB), spoke with Quartz for the latest installment of our “Smart Investing” video series.

Watch the interview above and check out the transcript, which has been lightly edited for length and clarity, below.

ANDY MILLS (AM): Big tech names like Nvidia and Microsoft they have led the market higher for the past two years. Do you see it continuing into 2025?

TONY ROTH (TR): We’re currently seeing a rollover trade in other areas of the market, but I think longer term we certainly expect to see these big names continue to grow earnings at a fairly rapid pace. One thing that is important to note, however, is that it is not a monolithic group. So there are some companies that will do much better than others. Even within the Magnificent Seven, you’ll probably see a rotation of some names in that group and some names in that group.

One of the aspects of what’s happening in the market today that I think is quite remarkable is that we’re at new highs as we sit here. And Nvidia (NVDA) is probably about 20% off its all-time high. Given what we experienced in the first half of the year – where it appeared to be a single-stock driven market – let’s say that right now it’s pretty remarkable. I think most participants could have felt that it would be difficult to reach these levels on the S&P without Nvidia’s leadership. And not only did we have no leadership, but it’s actually going in a different direction.

AM: Yes. So AI is, I think, for most investors, a pretty obvious place that people have invested. What other sectors are you guys looking at that people should try to get into this year?

TR: Funding has done quite well this year – not all of them equally, again, but if you look at, for example, the big money center banks, they’ve done quite well. Some of them have done extraordinarily well, such as JP Morgan, which is now priced quite high. But overall, right now with rates going down, unless we have a recession, which is our basic view, that should certainly favor regional banks.

And we think that, for example, in the financial sector as well, we like insurance companies, which continue to benefit from these expanded premiums. And I think probably a lot of the costs will come down, but the premiums won’t come down as fast. So (insurance companies will) take advantage of that leverage. It’s almost like when the price of oil drops, but you don’t see the price at the pump drop as fast. So I think you will see this phenomenon with insurance companies.

And then other areas that we like are the discretionary companies in this economy because we think the consumer, particularly the high-end consumer, is in good shape. And beyond that, we really focus across all sectors on quality companies – so companies that have attractive debt-to-equity ratios, that aren’t too leveraged, that have low earnings variability, that have good management teams management, intellectual property, capital, etc. Such companies should do well in this type of environment.

AM: Now, you mentioned that your firm doesn’t see a recession as a likely scenario for the future. What makes you think that?

TR: I would probably start with the labor market. The labor market is indeed the foundation for the consumer. So when you look at the labor market, what you see is that jobless claims are actually low relative to the overall size of the labor market. And when you look at wages, real wages are not just positive, which we haven’t seen in a long time, but if you look at what we think is (to get a little bit cheesy) the second derivative, which is where a real salary goes, actually increase. They are gaining ground. So when you look at that and consider that the top three quartiles of the consumer still have excess savings and checking accounts, etc., that bodes well for the economy.

So the job market is in pretty good shape. It’s not in great shape. It’s not in perfect shape. There are also some worrying signals, but that is part of the normalization process. So the labor market is in good shape, the consumer is in good shape, CapEx continues to do well. And usually when you see a recession, there’s usually a catalyst. Usually there is overinvestment, or there is a bubble, a financial bubble, or there may even be an external event, if you will, geopolitical or exogenous. And so we don’t see any of that happening, necessarily.

Sure, that could happen as a result of the election, but there are so many levels of uncertainty with the election right now that we’re not investing for that. We’ll be watching this very closely, but we’re not linking the election to a recession right now.

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