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Record market rally will include media, not software: Wells Fargo

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The market’s biggest bull predicts the S&P 500 will rally another 7%, but he warns a popular trade won’t be along for the ride.

Wells Fargo Securities’ Chris Harvey recently cut software to underweight from neutral and declared it a crowded trade. He based the decision on technicals and earnings fundamentals and high valuations.

“From a valuation point of view, you’re paying about a 75% premium to the market for software and that’s too rich,” the firm’s head of equity strategy told CNBC’s “Trading Nation” on Friday.

The Dow Jones US Software Index is up 28% over the last five months.

“It is a work from home play,” said Harvey. “We just don’t think there’s a whole lot of opportunity in the short term.”

He finds the opposite is true for media and entertainment.

“When we downgraded software, we did upgrade media and entertainment,” said Harvey. “If we look at the media and entertainment space, you’re seeing better upward revisions, better growth opportunities. But you’re only paying a 15% premium.”

He boosted his media and entertainment group rating to overweight from neutral and listed it as his top market play.

“There’s a lot of money to be spent. There’s still a lot of pent-up demand,” he said. “The media and entertainment space offers a much better opportunity to capitalize on that reopening play.

Not only does he see strong fundamentals and improving sentiment, Harvey contends advertising is making a comeback in the diverse group, which includes everything from cable companies and big cap tech names.

The S&P 500 Media & Entertainment Index is up 4% over the last month and 34% so far this year.

‘We want to get more aggressive’

“Opportunities still abound, and we want to get more aggresssive on that cyclical trade,” added Harvey.

Last Tuesday, Harvey increased his S&P 500 year-end price target to 4,825 from 3,850, a Wall Street high. Despite his bullishness for the final four months of the year, he gave a less optimistic outlook for 2022 — delivering a 4,715 target. Harvey believes a the record year will be followed by a hangover of sorts.

But for now, he’s firmly in the risk-on camp.

“We want more cyclical exposure,” Harvey said. “We want more exposure to what we consider high Covid-beta plays because we do think the economy is going to move forward.”

On Friday, the S&P 500 and tech-heavy Nasdaq closed at all-time highs. The S&P 500 closed over 4,500 for the first time. Meanwhile, the Dow is about a half percentage point away from its record high.


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