Disruptive Growth – We see a base case scenario that is very compelling for growth equities
December 2023
Challenges and opportunities: Click here to read GAM's investment managers' Outlooks for 2024
Risk assets did better in 2023 than many had expected at the start of the year as economic activity remained strong, driven by strength in the cash-rich consumer and the apparent taming of the inflation dragon. 2024 will not have the benefit of these two factors - in fact they may well prove to be headwinds as stubborn core inflation remains persistent and consumer cash levels run low. This latter factor is starting to show up in more depressed outlooks for discretionary spending – on a micro level visible in retail spending, payments volumes and basic services like food delivery.
The 2023 equity market picture was not all as robust as the headline numbers might suggest. While the S&P 500 index has tacked on close to 20% returns, the S&P equal-weighted index has hardly risen at all. Further down the risk curve, the Russell 2000 is also broadly flat for the year. Returns have been highly dependent on the “Magnificent 7” (M7) (Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia, and Tesla). The Goldman Sachs mega-cap basket of stocks is up 70% year-to-date (at the time of writing)! Not owning these names has been a significant drag on performance. We believe there were three factors at play in the strength of these names. First, investors sought big, liquid, safe and relatively cheap equities. Second, heading into 2023, there was concern over economic growth and a good proportion of these names rely on economically sensitive revenues like advertising (Alphabet and Meta) or retail (Amazon). This led to some of the M7 being sold off at the end of 2022. Third, May 2023 saw the real results of ChatGPT’s launch late last year, with one of the biggest blowout earnings reports from any large company ever coming from Nvidia.
When we put all the 2023 drivers together we see a base case scenario that is very compelling for growth equities. It is likely that inflation will remain stubborn but in a more palatable range below 4-5%. This would allow interest rates to remain ‘peaked’. The mere sniff of softer economic growth in November and the more than 50 basis points decline in US 10-year yields led to a sharper move up in equities. Growth fundamentals have not blinked, with over 90% of S&P technology company earnings beating expectations in Q3 2023. We do not expect the next few quarters to be any different. Growth remains strong. However, the valuation of the M7 now appears stretched relative to the market. On the broadest measure, the S&P 500 trades on 18x 2024 expected earnings (Goldman Sachs); this is above the average levels of the last 30 years. However, the equal-weighted S&P trades at 14x 2024 earnings, at the lower end of the average 30-year range. The forward PE of the M7 names is 29x and this, we believe, is the key factor in our base case that growth equities will remain robust but that the winners will come from below the M7 names. The artificial intelligence (AI), healthcare, storage, and Software as a Service (SaaS) themes will drive the best returns, in our view – it is a bottom-up stock pickers’ market for 2024.
The wild card for disruptive growth will be China, where valuations have sunk to ridiculously low levels. Efforts to stimulate growth in the Chinese economy against a backdrop of ultra-low inflation should be rewarded with outsized returns in equities and for this reason, we believe the macro and geopolitical risks are more than priced in.
In summary, we believe growth equities will continue to perform well in 2024, led by names outside the M7, with China as a good risk/reward wildcard.
Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio nor represent any recommendations by the portfolio managers nor a guarantee that objectives will be realized.
Indices referenced herein (S&P 500 Index, Russell 2000, etc.) are provided for illustrative purposes only, are unmanaged and do not incur management fees, transaction costs or other expenses associated with a portfolio. Therefore, comparisons to indices have limitations.
This material contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio nor represent any recommendations by the portfolio managers nor a guarantee that objectives will be realized.
Indices referenced herein (S&P 500 Index, Russell 2000, etc.) are provided for illustrative purposes only, are unmanaged and do not incur management fees, transaction costs or other expenses associated with a portfolio. Therefore, comparisons to indices have limitations.
This material contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.