The Venture into Wild Growth
By: Thomas Martin, CFA, Senior Portfolio Manager
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Investors are on the prowl for companies boasting robust and profitable earnings growth. Similar to Max’s quest in Maurice Sendak’s beloved children’s book, they yearn for the untamed allure of fresh investment themes, yet seek the safety of established markets that offer reasonable competition through efficient operations. Sectors, industries, and companies meeting these criteria have served as the golden egg-layers following the stock market’s 2022 tumult.
The Quest for Growth
The year 2023 marked a leveling off in growth, with 2024 poised to carry on the trend. When was the last time earnings expectations stood at a “normal” level? Judging by the consensus estimate’s stability for a given year, that has been a rarity. Typically, the path of the S&P 500’s consensus estimate from tracking inception to historical outcome is a descending slope. The last era of relative “stability” spanned 2011-2017. The years following exhibited unexpected surges and dips, particularly with Covid disrupting the landscape. However, since January last year, consensus estimates for 2023, 2024, and 2025 have shown striking steadfastness.
Roaming Where the Earnings Are
Investors gravitated toward sectors with burgeoning earnings, and stock performance duly followed suit. In 2022, both the energy and industrials sectors emerged as robust earners, outstripping the S&P 500. Conversely, communications services, consumer discretionary, and information technology witnessed substantial earnings declines with consequent underperformance. The tide shifted in 2023, with energy earnings dipping into negative territory and underperforming. Industrials’ growth decelerated, trailing behind. Meanwhile, communications services, consumer discretionary, and technology saw their earnings rebound positively, all outperforming expectations.
Tracking the Magnificent Seven
The Mag 7 dwell far from the energy and industrials realms. While their stocks shone in 2023, it wasn’t merely hype that fueled their rise but robust earnings growth. The Mag 7 boasted a 31% surge in net income in 2023, towering over the S&P 500’s 6% growth as well as the remaining 493 companies at a mere 1.9% growth.
Forecasting the Future
Expectations point towards robust growth in 2024. As 2023 draws to a close, EPS growth for the S&P 500 is anticipated at around 2.5%, per FactSet. Projections indicate an acceleration to 10.9% in 2024 and a further surge to 13.4% in 2025. Net income growth forecasts for the Mag 7 herald a 20.9% Rise in 2024, with the S&P 500 marking an 8.8% uptick and the remaining 493 companies expecting a 6.1% growth.
Navigating the Unknown
What could rock the boat? A myriad of possibilities. Macro concerns such as inflation, Federal Reserve policies, employment metrics, and consumer sentiment, coupled with potential fiscal shifts and market risk perceptions, could swiftly reshape the earnings landscape.
Staying the Course
Our equity strategies maintain diversification, risk vigilance, and a keen eye on evolving dynamics and fundamentals. Our approach factors in company competitiveness, quality, execution, growth, and valuation — essential elements for curating a well-rounded equity portfolio in tumultuous times.
Sources: FactSet, Strategas
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