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Equities are continuing their low-volatility grind higher this quarter. As this is generally good for business I am not sure I want to jinx this by talking about seasonality, momentum and Santa rallies. Instead, and as this is probably my last weekly note for 2024, I thought I would look back and show four charts and tables that tell the story of the year, which also help me look forward into 2025 and beyond.
First up, there are plenty of (legitimate) concerns that the US tech sector and all-things AI are in the middle of a hype-cycle and are poised to disappoint in 2025. To those people tempted to sell or even short the technology sector its worth having the chart below in mind. The seven US tech giant’s earnings were up 35% in 2023 and 33% in 2024. During that period the earnings for the 493 other companies in the S&P 500 fell. It’s pretty hard to outperform if you invest in companies whose earnings don’t go up – just ask long suffering UK investors. If you want to tell a story of cheaper value companies or markets out-performing from here you need to have a pretty convincing story about why the earnings picture will be better for them in 2025 than it was for the last couple of years. Outside of potential further stimulus in China, I am not sure I see many of those catalysts today.
And it’s not just me who is bearish earnings growth outside of technology. When I think about 2025 I have this chart (which I have shown a few times before) seared into my head.
My two takeaways from this are (i) equity markets outside of the US are actually pretty reasonably priced and (ii) the biggest risk for investors next year is disappointing earnings from the US and US tech in particular. We are back to close to 2000 tech bubble valuation levels today. The room for the tech sector to disappoint is pretty small.
It is tempting to think this era of US exceptionalism will last forever, but history shows us this probably will not be the case. Japanese and Chinese banks have briefly been among the world’s largest companies but are nowhere to be seen today. And even within the US there has been plenty of change. As an example, here is the changing story of the United States’ largest companies for the last 40 years. For whatever reason staying at the top is hard. Just ask the oil majors or General Electric or AT&T.
The final big picture theme of the last few years for me has been the importance of fiscal policy. First in helping cushion the fallout from Covid and then in helping flame the surge in inflation. Today I think government policy is probably one of the most important unknowns for the next few years. Over here we will see what return our government is able to get from increased public investment. In the US it looks like Elon Musk and Vivek Ramaswamy are going to have a proper go at shaking up public sector bureaucracies. This has been tried before but it is interesting to me just how much cross-party consensus there is that something radical needs to be done. If anyone is going to pull off reform I feel it will be the incoming Republican administration.
And any success they have might filter through to the UK. And boy do we need some help. Productivity growth is the main way we all get a little bit richer on average each year. And there is just no productivity growth at all in the UK public sector. Any change to this story here and/or in the US would be the kind of welcome structural change that supports investment returns for the rest of the decade and beyond.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
