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Equity

5 reasons why equities could defy the odds

Marc E. Nabi Maria Karahalis David Polak

March 21, 2024

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.

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marc-nabi-color-600x600

Marc E. Nabi is an equity investment director and portfolio strategy manager with 35 years of investment industry experience (as of 12/31/2023). He holds an MBA in finance from New York University and a bachelor’s degree in accounting from the University of Michigan, Ross School of Business.

maria-karahalis-color-600x600

Maria Karahalis is an equity investment director and portfolio strategy manager with 37 years of experience (as of 12/31/23). 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-color-600x600

David Polak is an investment director with 41 years of investment industry experience (as of 12/31/2024). He holds a bachelor’s degree in economics from University College London graduating with honors.

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* On average, the equity-focused American Funds hold their investments for 4.3 years, whereas their peers hold their investments for 1.9 years, based on the equal-weighted blended averages across each of the 20 equity-focused American Funds' respective Morningstar categories as of December 31, 2022. Fixed income funds are not included in this calculation due to the differing nature of trading in the asset class versus equity investing. American Funds are not registered for sale outside the US.
 
‡ Governance & Accountability Institute, Inc. (G&A) 2021 Sustainability Reporting in Focus report, focusing on the 2020 publication year. 92% of the S&P 500 companies published a sustainability report in 2020 vs. 20% in 2011. 
 
§ U.S. Bureau of Labor Statistics, April 2021.
 
‖ Deutsche Bank. “Hospital Trends into 4Q and views around 2022.”
 
# Berg, Florian, Kölbel, Julian and Rigobon, Roberto. 2022. "Aggregate Confusion: The Divergence of ESG Ratings." MIT Sloan School Working Paper 5822-19, MIT Sloan School of Management, Cambridge, MA.
 
Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.
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Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.
 
Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.