Either your earnings are growing or they’re regressing.<\/p>\n
If investors can segment the market this way, then they’ll survive the ups and downs of an economy that’s adjusting to inflation – and now officially transitioning into a recession.<\/p>\n
Although this dichotomy is clear in 2022, it was disguised in 2021. For example, the chart below shows performance between the “haves” and “have nots” of the S&P 500.<\/p>\n
It’s a comparison between the top 25 versus bottom 25 companies by earnings growth in 2021 and 2022…<\/p>\n
![\"Chart\"](\"https:\/\/cdn.jeffclarktrader.com\/JMU\/images\/202207\/20220729-jmu-01_xsd363.png\")
<\/div>\nNotice how the worst 25 companies by earnings per share (EPS) growth rate still averaged a 15% return last year.<\/p>\n
Then look at 2022…<\/p>\n
Now that the bubble popped, a rising tide no longer lifts all boats.<\/p>\n
But the spread in performance between these baskets of stocks has grown from 30% to 50%.<\/p>\n
The difference in performance will only continue… with no need to interpret what the Fed’s next mistake will be.<\/p>\n
Right now, I see a big opportunity to deploy this kind of strategy within big tech.<\/p>\n
The chart below shows EPS growth rates and the 3-month performance for nine of the biggest tech stocks…<\/p>\n
![\"Chart\"](\"https:\/\/cdn.jeffclarktrader.com\/JMU\/images\/202207\/20220729-jmu-02_xsd363.png\")
<\/div>\nThe average performance of the companies with positive growth rates versus the ones with negative growth rates is close.<\/p>\n
Eventually, they’ll diverge and that’s where the opportunity is.<\/p>\n
Now that the market has reached the 4025 target I called for on June 28<\/a>, it’ll begin to splinter in a more pronounced way.<\/p>\n The relief rally has recently lifted all<\/em> boats once again. Now, it’s time for divergence to take hold.<\/p>\n To see what I mean, let’s go over some big-name tech stocks…<\/p>\n Part of the reason the performance has been so close recently is because investors have been “bottom-fishing” in Netflix (NFLX). Bottom fishing refers to investing in assets that’ve experienced a decline and are considered undervalued.<\/p>\n NFLX fell 72% at it lows this year. And since people are conditioned to believe everything goes up at some point… NFLX may have seemed like a good play from a technical angle.<\/p>\n Recently, it got an extra earnings boost from a report that wasn’t as bad as people thought it would be.<\/p>\n But the bottom line remains… Netflix is an old hat with a bad growth story.<\/p>\n In fact, NFLX should be valued no higher than Comcast, CBS, or other media names.<\/p>\n The problem with media stocks in general – whether content-related like NFLX or social media like META – is that you’re only as good as the current social trend. And social trends are fickle.<\/p>\n Consumer preferences change fast. Facebook (META) is no longer popular, which is why it trades for a 15X price-to-earnings multiple (P\/E)<\/a>. At its peak, META traded around a 28X P\/E last September. The 72% drop in NFLX shows it’s not popular anymore either.<\/p>\n