Capital IdeasTM

Investment insights from Capital Group

5 reasons why equities could defy the odds
Marc Nabi
Equity Investment Director
Maria Karahalis
Equity Investment Director
David Polak
Equity Investment Director

The dominance of megacap tech stocks has prompted debate around how much higher equity markets can go, especially in the US.

In our view, even accounting for the recent climb in stocks, overall valuations do not appear to be stretched. Global corporate earnings have bounced back from a near trough and are expected to improve further from here. Moreover, moderating inflation and declining interest rates could create a highly favourable backdrop.

Corporate earnings set to rebound

Estimated annual earnings growth

Estimated annual earnings growth

Estimates as at 31 December 2023. The chart shows estimated earnings growth for each region. Estimated annual earnings growth is represented by the mean consensus earnings per share estimates for the years ending December 2023, December 2024 and December 2025. U.S. = S&P 500 Index. Europe = MSCI Europe Index. Japan = MSCI Japan Index. Emerging markets = MSCI Emerging Markets Index. Sources: Capital Group, FactSet, MSCI, Standard & Poor's

While we may see some volatility related to earnings, elections, the pace of interest rate cuts, or geopolitical events, we believe that equities are in a sweet spot.

As earnings growth recovers in non-tech sectors, we could see a more diverse set of companies garner investor attention. Meanwhile, companies in the S&P 500 Index excluding financials are holding cash at levels that are near 10-year highs which could fuel stock buybacks, M&A activity or dividend payments.

Marc Nabi is an equity investment director with 35 years of investment industry experience. He holds an MBA from New York University and a bachelor’s degree from the University of Michigan.

Maria Karahalis is an equity investment director and portfolio strategy manager with 37 years of experience. She holds a master’s degree in management from MIT Sloan School of Management and a bachelor’s degree in economics from Wellesley College.

David Polak is an equity investment director with 40 years of experience. He holds a bachelor’s degree in economics from University College London graduating with honors.