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Here are the sectors and stocks that could outperform in the second half of 2025.

Transcript:

CAROLINE WOODS: OK joining me now is Todd Ahlsten, CIO of Parnassus investments. Todd, Thanks so much for being here.

TODD AHLSTEN: Thanks Caroline, I hope you had a great Labor Day weekend.

CAROLINE WOODS: I did, you as well. So, Todd, we're kicking off September, though, on a pretty downbeat note. The major averages all firmly in negative territory. What is your investment outlook for the rest of this year. Is there room to run or is this rally just out of steam.

TODD AHLSTEN: Well, we started the year feeling pretty constructive on the markets. And there's really four pillars to that where we thought the market could have a double digit year and the market being the S&P 500. The first thing is we still believe in American exceptionalism, just the S&P 500. Just a great collection of assets, growing markets and just very innovative. And, you know, 40% of the companies in the S&P 500 have 60% margins in terms of gross margins. So just great companies. Number two, the AI build out is very real, very tangible and going to drive growth and earnings. Number 3 is we thought the economy could grow this year. And so good economic growth. And number four we think the liquidity cycle being lower interest rates eventually and growing global liquidity M2 and private credit would grow. So those four factors seemed like they would have a positive gradient this year. And we still, you know, believe that's the case. Looking for double digit returns for the market this year.

CAROLINE WOODS: OK so can you be a bit more specific when you say double digit returns. Because at this point the S&P 500 is up. What about 8% year to date. So is there 2% more to rally here or is there 12% more?

TODD AHLSTEN: So we like to think long term. But we began the year and you know walked down memory lane. The S&P was a bit below 6,000. And we said through the four factors we talked about that, double digit S&P earnings growth, along with a stable PE multiple in the low 20s, could yield a S&P target of 6,500 to 6800 by the end of the year, and we're pushing up close to the bottom of that range now, and we're not updating the targets. But I think that landing spot is still very valid. And if the earnings come in strong, you could see the markets continue to push towards potentially the higher end of that range that we still believe is in play.

CAROLINE WOODS: So talk to us about what could drive the market to 65 6800. And at this point, are there still some overlooked opportunities for investors right now. Because, you know, we've seen some really impressive run UPS in a lot of names.

TODD AHLSTEN: We have. And I think so some of those areas that have done well, say hyperscalers and semiconductors, those companies have shown some really strong growth. And I think going forward, though, there could be some areas that have not participated as much that could here in the second half of the year, and I would just highlight two of those areas. Number one is software companies. Your traditional software as a service or SaaS companies have just not participated this year as there's concerns about AI displacing software. But when you look at companies like Salesforce in Workday and ServiceNow, those type of companies have not participated this year. But software is still going to be very important in the economy, and those companies are still growing and the multiples are quite low. So there could be an unlock in software. Also, some areas of health have underperformed this year. And ironically, health is an area that's showing pretty strong earnings at relatively low multiples. Just the market hasn't really rewarded those companies yet. So, you know, think about life sciences companies like Thermo Fisher or a Danaher. And some of those areas have just have lagged and think about even medical device companies. So when you think about health care software. And then there's some other areas that could participate, say, in housing if we started to get some, you know, rate cuts that have lagged a bit. Companies that are levered to that could do well. And also just outside of the Mag seven, there's some areas that have gone through some cyclical weakness that could start to participate later this year.

CAROLINE WOODS: OK and you also have your ETF picks as a core select ETF. Tell us why an investor would want to invest in a core select ETF versus a broader market ETF and how you're evaluating growth potential in your holdings there?

TODD AHLSTEN: Yeah so for us really the main thing is consistent process of high quality, great American companies. And in this structure it's quite concentrated. So whereas our mutual fund strategy, the Parnassus core equity fund has 40 stocks.

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