We’ve had the ‘Faangs’, the ‘Magma’ stocks, and now the so-called ‘Magnificent 7’ – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. These stocks have contributed half of the performance in global equities this calendar year, as much as 70% of the S&P’s rally, taking the latter to just 5% from its all-time highs.
While it does feel like the growth trade is back, the equity rally has become increasingly unbalanced and such narrow performance doesn’t necessarily indicate animal spirits are alive and well.
This isn’t a return to the 2021 growth-at-any price duration bubble. Real rates continue to rise at 1.6%, rather than the 0% or negative net real rates that supported the bubble from 2020 to 2022. But we’re also not seeing outperformance of more traditional defensive sectors. Instead, there is performance of a narrow subset of stocks that are perceived as defensive and have structural growth prospects.
See also: Stock in focus – Heineken (AMS: HEIA)
There’s a continuum of outcomes between a hard landing (recession) and a soft landing. At the margin, the market seems tilted towards a soft landing, pricing in an improved growth/inflation mix. It looks like growth will remain resilient while inflation recedes, and that the US Federal Reserve will ultimately be able to gently ease off the brakes as opposed to slamming them on to avoid recession.
To read more, visit the September edition of Portfolio Adviser Magazine
