If you’re looking for a consistent message from the markets, good luck. Investors stick with a narrow group of stocks with strong earnings that are in the bag, and ignore everything else. “Investors generally like a story that’s really clear. Right now, there are a lot of multiple stories in place,” Fundsrat Managing Partner Tomas Lee said Tuesday on CNBC’s “Global Exchange.” You can say that again. Instead of one story, there is a series of contradictory competing stories. For example, the economy is said to be strong, as shown by the jobs and retail sales reports. There is another group that already believes that the economy is rapidly weakening. Who is it? There are always differences of opinion about markets, but these views are at opposite ends. Some worry about growth, some worry about recession. Even the “economy is strong” camp seems to be divided on the implications of their belief. Some in this camp believe that the economy can withstand higher rates and are in the soft landing, and some are in the camp that believes that higher rates due to strong growth will force the economy into recession. You can see this in the Bank of America Global Fund Survey: 59% say there will be a soft landing, 30% say there will be a hard landing. No trend in market direction Try to find evidence that the market supports any of these stories. You can’t. A stronger economy should help cyclical stocks (industrials, materials) but they are not outperforming. They are lower every year, and even for shorter periods. Cyclicals in 2023: no outperformance here S & P 500 up 13% Industrials up 5% Materials up 1% A slower economy should help value stocks, but value has dramatically reduced growth throughout the year, and even in recent months. Growth vs. Value in 2023: not even close Russell 1000 Growth ( IWF ) up 28% S & P 500 Growth ( IVW ) up 20% S & P 500 Value ( IVE ) up 7% Russell 1000 Value ( IWD ) flat There’s only one sector with investment conviction The only sector with any investment conviction remains mega-cap growth, surpassing the S & P 500 and everything else. The ETF to watch is Vanguard Megacap Growth. Almost 60% of the ETF consists of the “Magnificent 7” group of Apple, Amazon, Alphatbet, Meta, Microsoft, Nvidia and Tesla. It is up 32% this year. Interestingly, more than 32% is exactly what the collective average earnings growth for the “Grandia 7” is for the third quarter, and almost the same (more than 44%) for the fourth quarter. By contrast, the other 493 stocks in the S & P 500 see lower (Q3) or flat (Q4) earnings projections. Q3 2023: Megacap tech is the revenue driver (revenue growth) 7 megacap: up 32.8% 493 others: down 4.6% Total S & P 500: up 0.2% Source: Factset Q4 2023: same trend (revenue growth) 7 mega-cap : up 44.1% 493 others: up 0.6% Total S & P 500: up 7.2% Source: Factset Funny how this works: stock prices tend to follow winning trends. For those of you really obsessed with mega-cap tech… Here are the Big 7 earnings estimates, compared to the same period last year. Note the huge jump in Amazon valuations for the fourth quarter, going from 3 cents in Q4 2022 to around 66 cents in Q4 2023. Also note that Tesla is a negative drag on earnings for the group, with declines in both quarters. Apple Q3: up 7% Q4: up 12% Microsoft Q3: up 13% Q4: up 14% Amazon Q3: up 107% Q4: up 2,091% (!) Nvidia Q3: up 471% Q4: up 316% Meta Q3: up 122% Q4: up 176% Tesla Q3: down 30% Q4: down 28% Source: Factset
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