Equity Outlook: Earnings Step Back into the Market Spotlight

Turning Point for Equity Markets?

The market’s resilience reflects a potential turning point for equity investors, in our view. After a prolonged period during which concerns about inflation, growth and interest rates dominated return patterns, we think corporate profits are regaining prominence—and growing optimism on the earnings outlook has propelled markets in the first quarter. If this trend continues, we expect equity returns to broaden, following the extreme concentration of markets in the Magnificent Seven, a small group of US mega-cap stocks, over the last year. 

On the surface, it might seem as though little has changed. During the first quarter, global growth stocks outperformed value stocks, as they did last year. Technology remained firmly at the top of US and global sector returns (Display, above). 

But beneath the surface, this doesn’t look like a rerun of 2023. For one, the Magnificent Seven, seen as the biggest beneficiaries of artificial intelligence (AI), didn’t behave like a cohesive cluster (Display). NVIDIA towered above the group while Apple and Tesla declined sharply. We don’t think AI enthusiasm is a bubble about to burst, because it’s being driven by real earnings growth across the technology industry, unlike during the dot-com bubble. However, diverging returns within the Magnificent Seven did reflect differences in each company’s business results, based on reported earnings growth for the full-year 2023.

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2024-04-02 09:29:32

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