Over the past five months, the MSCI All Country World Index, which seeks to represent 3,000 stocks from nearly 50 countries, has risen about 25%, while the prices of many other assets have rallied at a double-digit pace or even more. . . These are the differences that always exist in the markets. What is the reason for this revaluation? There are many factors at play, but in the case of indices, some experts believe they may be due primarily to more favorable financial conditions and higher valuations, rather than improving fundamentals.
It’s true that rising asset prices often lead to an even bigger rise as investors feel compelled to participate. However, a recent report written by Mike Wilson, chief strategist at Morgan Stanley, reveals how the current scheme is more favorable to sector rotation and favorable for some assets that have been left behind in 2023.
“From our point of view, it is difficult to justify the higher valuations of the indices calculated solely on fundamentals, given that the profit forecasts for 2024 and 2025 have barely changed in this period,” Wilson explains in this regard about the panorama that encompasses ba to Wall Street right now.
Currently, stock valuations have reached 2021-like highs in anticipation of improving growth following the slowdown in profits experienced by most companies last year. “While the recent easing of financial conditions could herald an acceleration in earnings, upward expectations for S&P 500 earnings per share in 2024 and 2025 remain stable following the Re Serva Federal’s downward turn in the fourth quarter. quarter,” comments the expert from the American investment bank.
Meanwhile, small-cap earnings per share estimates are down 8% for 2024 and 6% for 2025, following rates’ peak last October. “We think one of the reasons for the weak earnings per share revisions since last fall, especially in small caps, is the continued policy combination of strong fiscal stimulus and tight initial interest rates, which, in our view, “It is displacing many companies and consumers,” he analyzes.
Although the tightness of profitability within the equity market in the last year has been the subject of close scrutiny, as technology companies have mainly pulled the ship, according to Morgan Stanley this would be nothing more than a reflection of the “narrow performance of ”benefits”, and it makes sense. That scheme would help explain why most stocks remain below their 2021 highs. On the other hand, companies are increasingly prioritizing operational efficiency.
From breadth to winning sectors
The question for investors now is whether the market can finally expand in a more sustainable way. That is, not only the technological or financial sector is profitable in the long term. Wilson indicates that we are beginning to see an improvement in breadth in several sectors. “Looking ahead, we believe that a lasting expansion of this situation depends on whether other stocks/sectors can achieve earnings growth,” he notes.
A sector that shows strong breadth is the industrial sector, as observed in the Morgan Stanley report, which is a classic winner at the end of the economic cycle and beneficiary of important fiscal outlays (for example, the IRA and the CHIPS Act ). ) and the construction of data centers powered by artificial intelligence. But for Wilson there would be a winner with a lot of potential from now on. “A new sector that is showing strong amplitude is energy, which is the one that has had the best performance in the last month, but which continues to be significantly behind since the rebound in October began,” he analyzes.
