Trends Investors Should Watch This Quarter for Market Insights

Key Points

• The new quarter starts this week, and investors should consider what the market wants to see in the leading and lagging industries. 
• Following the money, some cracks begin to show in the foundation, and the leading stocks of today are beginning to falter. 
• Mega investors have placed their bets, and even if the S&P 500 doesn't do well, there's a place they can look into for safety.

Every investor knows that the stock market doesn’t trade based on the present, not even on the near future; the markets trade roughly depending on where expectations and forecasts are for the next 3-6 months. This is why portfolios must be adjusted according to the current trends and developments in the market and the economy.

Some of these include government, specific industries that act as leaders and laggers, commodities, and especially the most exciting areas of today, like the technology sector and the artificial intelligence wave that has been running hot for the past three to four years. Of course, there are stocks to think about, but like a true fund manager, investors need to start with the top.

The top is now obviously driven by the Federal Reserve (the Fed) and its promise to cut interest rates before the end of 2024. Leading the way is one of the sectors historically known to lead the economy: the real estate sector. Within it, investors have to gauge the beginning of the value chain found in the homebuilders, where stocks like Toll Brothers Inc. NYSE: TOL start to look like trouble. Others in the energy sector, like Chesapeake Energy Co. NASDAQ: CHK, look like a way to hedge, but more on that later.

Are the Market Leaders Still Leading in Today's Stock Market?

Starting from the leaders in real estate, investors can look at one of the few indicators that probably best spread out the sector. Building permits and housing starts are good places to start, both of which are down by 4% and 8.5% on the month, respectively.

They both peaked around 2021 and have been on a lower path, but the recent 6 months have shown an accelerating path lower, which is concerning. This is where investors can gauge the market's feelings about stocks within that space, particularly the homebuilders who lead the industry.

According to Goldman Sachs, the S&P 500 will grow its earnings per share (EPS) by an average of 5% in the next 12 months and will trade at a forward P/E of 18x. Anything below this benchmark spells trouble for any stock trading at too high a price.

According to Wall Street analysts, Toll Brothers stock, now trading at 96% of its 52-week high, is only forecast to have declining EPS in the next 9 months. It trades at a forward P/E of 10x. Both these measures spell trouble for the economy, and the cherry on top could be the weakness in the mortgage market index, which is now at 1996 lows.

Another nontraditional leader is now the biggest artificial intelligence play of the decade, Nvidia Co. NASDAQ: NVDA. Recently, investors hoped the stock would reach a new all-time high after posting earnings, but most were disappointed after price action led the stock lower.

Nvidia Provides Investors with a Strong Gauge of Today's Market Cycle

Semiconductor stocks are as cyclical as commodity stocks, with a development cycle followed by a sales cycle. In a development cycle such as 2020-2022, these stocks focus on keeping inventory low and spending a lot of capital on developing new technology to release into the market.

Now that Nvidia CEO Jensen Huang quoted that they expect to have lots and lots of supply, things are concerning for this market leader, as it could be approaching the end of the sales cycle. This marks the point when the newly developed technology has been widely bought and adopted, and supply becomes too abundant to drive prices lower and, therefore, profits.

This explains why the CEO himself has been selling stock at a rate of 120,000 at least five times a month since June 2024. Bears have also worked up the courage to go against this stock, as Nvidia’s short interest rose by 6.6% in the past month alone.

Warren Buffett and Stanley Druckenmiller Are Placing Their Bets to Weather the Market

Oil shocks and a potential currency devaluation might be at the top of these two investors' minds. Warren Buffett has accumulated a 29% stake in Occidental Petroleum Co. NYSE: OXY as a bullish bet on oil prices. Now that the Saudis have posted their balance sheet, showing they need oil at $95 or more to avoid a deficit, oil looks like a good place to be.

Even better for retail investors is Chesapeake Energy as it is higher up in the value chain. Wall Street analysts expect that stock to grow its EPS by 303.8% in the next 12 months, and those at Stephens landed on a $118 price target for the stock, daring it to rally by as much as 58.3% from where it trades today.

However, a bullish bet on oil is also a bearish bet on the dollar, which is why Stanley Druckenmiller (responsible for George Soros' returns) has looked overseas to emerging markets, as they tend to do well on a weaker dollar. Stocks like Alibaba Group NYSE: BABA caught his attention, and George Soros bought them, but he didn't stop there.

After selling out of his Nvidia stake, Druckenmiller also bought bonds through the iShares 20+ Year Treasury Bond ETF NASDAQ: TLT to bet on the Fed's interest rate cuts along with the potential need to boost a slowing economy.

So, the world's best investors are looking to commodities to hedge their bets. Oil could offer the most upside, but investors should also consider gold and silver, as they are currently competing for the spotlight.