Jefferies has advised investors to focus on quality, low-stress stocks as market volatility is expected to increase, particularly due to rising concerns about artificial intelligence (AI) investments. Desh Peramunetilleke, head of quantitative strategy at Jefferies, highlighted issues including potential overcapacity and high costs associated with AI operations, as major firms are projected to spend approximately $700 billion on capital related to AI.
The S&P 500 momentum index, driven mainly by AI-related stocks, has outperformed the broader market by over 70% since 2024, a performance reminiscent of the late 1990s dot-com boom. However, growing unease surrounding the sustainability of this momentum underlines the risk of a downturn. Although Jefferies maintains a positive long-term outlook on AI, factors such as adverse market sentiment could prompt significant retraction in AI-focused investments.
In light of these uncertainties, Jefferies has curated a list of high-quality companies that exhibit strong fundamentals and limited momentum. The focus is on firms with market valuations exceeding $10 billion, solid cash flow yields above 3%, and earnings projected at less than 20 times expected figures for the upcoming year.
Among the highlighted stocks, AbbVie stands out due to its favorable quality score, with expectations for compound annual earnings growth of nearly 28% in the next few years and a free cash flow yield of 5.2%. The pharmaceutical company recently reported $15 billion in worldwide revenues, bolstered by a robust immunology portfolio and a notable acquisition of Apogee Therapeutics. Netflix also appears on the list, with a market value of $320 billion and projected revenue growth, despite a recent decline in stock price.
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