Overall, although the various stock market indices have recently reached historically high levels, there are those who believe that the fundamentals and the macroeconomic context are still solid for shares, even if temporary phases of volatility due to events cannot be ruled out. economic or geopolitical and the uncertainty linked to the elections in the USA. Selectivity will be fundamental, but there is no shortage of those who display optimism, as in the case of the comments released by Capital Group.
The dominance of technology megacaps has led to questions about the sustainability of the bullish phase of the stock markets, especially in the United States. “In our opinion – they argue from Capital Group – even taking into account the latest surges, the overall valuations do not seem excessive. After nearing lows, global corporate earnings have rebounded and may see further improvement in the near future. Furthermore, slowing inflation and falling interest rates could create an extremely favorable environment. While some volatility related to earnings, elections, the pace of interest rate cuts or geopolitical events cannot be ruled out, we believe stocks are in a privileged position.”
There are five reasons to still be bullish, looking especially at the American market.
1. Profitable companies drag their shares
Earnings season was a success across the globe. In first place is undoubtedly the chip manufacturer Nvidia which announced excellent earnings growth figures and an increase in market capitalization of 277 billion US dollars. Meta ranked second, with a clear result that demonstrates the effectiveness of the cost containment measures initiated a couple of years ago. According to data compiled by FactSet, the blended rate of earnings growth of companies in the IT sector of the S&P 500 index would have risen by 22.7% on an annual basis. The valuations of these companies are high but not excessive. According to some analysts there is room to invest further.
2. US stock valuations do not appear excessive
At first glance, the valuations of some sectors of the S&P 500 may seem expensive, but they do not appear excessive compared to expectations. Earnings growth will play a crucial role in the sustainability of the current upward trend in shares, while in the last decade great impetus has come from the expansion of multiples and the context characterized by extremely low interest rates. The US economic environment also remains favorable, with a soft landing appearing more likely than a recession. Higher-than-expected inflation data released in January raised concerns about when the Fed might start cutting rates. However, as long as earnings growth continues to meet or exceed expectations, and as long as the labor market remains strong, US stocks should be fine.
3. Global companies offer good value
Many European and Asian companies have achieved excellent market share in sectors such as semiconductors, aerospace, pharmaceuticals and luxury goods. Expectations of lower rates in various non-US markets may also be a impetus for global equities. Japan – the world’s best-performing global stock market year-to-date (as of February 29) according to the MSCI Japan Index – is attracting attention with long-overdue stock market and corporate governance reforms. Meanwhile, emerging markets such as India and Mexico could benefit from rebuilding global supply chains, as their new manufacturing hubs develop smartphones, cars, household appliances and computer electronics.
4. The Magnificent 7, but not only
Despite the mind-boggling returns achieved in 2023, the Magnificent 7 appear less extraordinary over a slightly longer time horizon. In the two years from the beginning of 2022 to the end of 2023, only one of the Magnificent 7 was among the companies in the S&P 500 index with the best returns, due to the sharp declines recorded in 2022. And as earnings growth resumed in non-tech sectors, a more diverse set of companies could attract investor attention. To reduce portfolio concentration risk, an “asset allocation” program may favor greater diversification by reducing overall exposure to technology companies and US stocks.
5. The increase in cash flows
At an aggregate level, the companies in the S&P 500 index (excluding financial companies) hold liquidity at levels close to the highest levels of the last 10 years, a situation that could favor share buybacks, extraordinary transactions (M&A) or distribution of dividends. For example, in recent months there has been an increase in extraordinary deals among some oil and pharmaceutical giants – deals that could contribute to long-term earnings growth. In terms of free cash flow, US businesses appear in good shape. Free cash flow (FCF) is not a perfect metric because it excludes extraordinary operations, but it still represents a good indicator of the health of companies. Looking at the data, in 2023 the FCF of non-financial companies included in the S&P 500 index reached an all-time high of almost 1.
500 billion US dollars, up a good 12.3% year-on-year.
Tags: reasons invest pays bullish
