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Need to Know: Dig a little, and you’ll find better stocks than the tech superstars, says Jefferies

Need to Know

Critical information for the U.S. trading day

Stock rotation coming?

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More movement on U.S.-China trade talks and continued virus hopes are nudging markets higher for Tuesday.

That is on the heels of a stellar start to the week, with the Dow industrials ending above 28,000 for the first time, and records for the Nasdaq
and S&P 500
It is hard to look past the technology stalwarts, which keep dazzling investors.

Our call of the day comes from Jefferies’ equity strategist Steven DeSanctis, who finds investors have become too fixated on those big name tech stocks like the FAANGs — Facebook
and Alphabet-owned Google

“I really don’t think people realize that earnings growth and the trending revisions have really broadened out,” DeSanctis tells MarketWatch. “They’re still very focused on the work-from-home theme and those stocks that have the best balance sheets, that have revenue growth.

“When earnings growth and revenue growth is hard to find, you pay a huge premium for that, but if earnings growth and revenue growth start to get better and broader next year, you start to say that valuations will start to matter,” he adds.

So as revenue growth continues to broaden out, investors will see a rotation of stocks moving into that positive light, away from the big superstars, who may be less popular down the road due to valuations. DeSanctis says he is getting more upbeat on economic indicators, and that will be good for cyclical stocks, which tend to improve alongside data. With that, materials stocks could start to outperform tech and health care, he says.

For starters, he’s looking closely at mergers and acquisitions. “I think other companies are going to call into question why they’re public, so we’re starting to see early signs of M&A activity pick up similar to what we saw in 1999 or 2000,” he says, adding that this could boost small-cap stocks, cyclical and value names.

And while smaller domestic stocks have seen improvement recently, they are not as cheap as they were, he says. Those names with higher overseas revenue may improve as the dollar weakens and Europe’s economies strengthen. That leads to a handful of names he recently highlighted in a note that have substantial exposure overseas.

Those are sports retailer Foot Locker
, financials Virtu Finl’
and Bank of NY Mellon
health-care stocks Bio-Rad Lab
and Agilent Tech
industrials Equifax
Lincoln Electric
and Parsons

The market

and Nasdaq
futures are on the rise, alongside European stocks
In Asia, markets finished mostly higher.

The buzz

Digital payments provider Ant Group filed a prospectus with the Hong Kong Stock Exchange for what’s expected to be the world’s biggest initial public offering, with dual Hong Kong and Shanghai listings.

China says Vice Premier Liu He, U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin were involved in “constructive” trade talks, of which the U.S. noted “progress” on both sides. That is a tone shift from President Donald Trump, who said on Sunday he’d be open to a China decoupling.

Prompted by iPhone maker Apple’s stock split, three big names, including oil major Exxon Mobil
are out of the Dow, to be replaced by software group Salesforce
biotech Amgen
and conglomerate Honeywell

In Seoul, 27 people were infected with COVID-19 in a Starbucks
but four mask-wearing employees were spared. And an infectious diseases expert says don’t panic about reports of the first virus reinfection.

Case-Shiller home prices, consumer confidence and new home sales are all on tap for Tuesday.

Donald Trump Jr. addressed the Republican National Convention with a warning that Democratic challenger Joe Biden’s “radical left-wing policies would stop our economic recovery cold.”

Random reads

Kenosha, Wisconsin, sees another night of protests over police shooting of a Black man.

Much needed tidings of joy. Pumpkin Spice Lattes are back.

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