Buy stocks on weakness that typically benefit from rate cuts, Canaccord’s Tony Dwyer suggests

The Federal Reserve may have new incentives in the second quarter to cut rates deeper this year.

Canaccord Genuity’s Tony Dwyer thinks a deteriorating jobs market and easing inflation will ultimately push the Fed to act.

“I’m not saying that they have to go back to zero, but they have to be more aggressive,” the firm’s chief market strategist told CNBC’s “Fast Money” on Thursday. “One of the most aggressive topics that I talk to clients about is how bad the incoming data is.”

Dwyer contends falling employment survey participation rates are skewing the Bureau of Labor Statistics’ jobs report data. The next monthly jobs reading is due Friday.

“It’s not that they’re manipulating the data. The conspiracy theories go bananas with this stuff. It’s really that they don’t have a good collection mechanism. So, the revisions are significant and most of them have been negative now,” said Dwyer. “Our focus now is those rate cuts are what you need.”

At the March Federal Reserve policy meeting on interest rates, officials tentatively planned to slash rates three times this year. They would be the first cuts since March 2020.

Dwyer expects the rate reduction will give financials, consumer discretionary, industrials and health care stocks a boost. The groups are positive this year.

“Our call is to buy into the broadening theme on weakness rather than simply adding to the mega-cap weighted indices. The top 10 stocks still represent 33.7% of the total SPX [S&P 500] market capitalization,” he wrote in a recent note to clients. “History shows that is historically high and doesn’t last forever.”

According to Dwyer, market performance will become much more even by the end of this year into 2025.

‘It’s not just the Mag 7’

“It’s coming from a broadening of the earnings growth participation. It’s not just the Mag 7,” he told “Fast Money.”

The “Magnificent Seven,” which is made up of Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla, is outperforming the broader market this year — up 17% while the S&P 500 is 10% higher.

The S&P 500 closed at a record high on Thursday and just posted its strongest first quarter gain in five years.

“When you’re this overbought and this extreme to the upside, you just want to wait for a better opportunity,” Dwyer said. “In our view, that comes with there is worsening employment data that cuts rates. You have to worry about the economy. That’s when I want to go in.”

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