If you’re searching for a consistent message from the markets, good luck. Investors are sticking with a narrow group of stocks with strong earnings that are in the bag, and ignoring everything else. “Investors generally like a narrative that’s really clear. Right now, there are a lot of multiple narratives in place,” Fundsrat’s Managing partner Tomas Lee said Tuesday on CNBC’s ” Worldwide Exchange .” You can say that again. In place of a single narrative, there is a string of contradictory competing narratives. For example, one holds that the economy is strong, as shown by the jobs and retail sales reports. There’s another group that already believes the economy is weakening rapidly. Which is it? There are always differences of opinion on markets, but these views are at opposite ends. Some are worried about growth, some are worried about recession. Even the “economy is strong” camp seems to be divided on the implications of its belief. Some in this camp believe the economy can withstand higher rates and are in the soft landing camp, and some are in the camp that believes higher rates due to strong growth will force the economy into a recession. You can see this in the Bank of America Global Fund Manager Survey: 59% say there is going to be a soft landing, 30% say there is going to be a hard landing. No trend in market direction Try to find evidence that the market supports any of these narratives. You can’t. A stronger economy should help cyclical stocks (industrials, materials) but they are not outperforming. They are underperforming on a yearly basis, and even over 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 is dramatically underperforming growth on the year, and even in the last few 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 investing conviction The only sector with any investing conviction remains mega-cap growth, outperforming the S & P 500 and everything else. The ETF to watch is Vanguard Megacap Growth . Nearly 60% of the ETF is made up of the “Magnificent 7” group of Apple, Amazon, Alphatbet, Meta, Microsoft, Nvidia and Tesla. It’s up 32% this year. Interestingly, up 32% is exactly what the collective average earnings growth is for the “Magnificent 7” for the third quarter, and almost the same (up 44%) for the fourth quarter. By contrast, the other 493 stocks in the S & P 500 are seeing earnings projections lower (Q3) or flat (Q4). Q3 2023: Megacap tech is the earnings driver (earnings growth) 7 megacap: up 32.8% 493 others: down 4.6% Total S & P 500: up 0.2% Source: Factset Q4 2023: same trend (earnings growth) 7 mega-cap: up 44.1% 493 others: up 0.6% Total S & P 500: up 7.2% Source: Factset Funny how that works: stock prices tend to follow earnings trends. For those of you truly obsessed with mega-cap tech… Here are the Magnificent 7 earnings estimates, compared to the same period last year. Note the enormous jump up in Amazon estimates for the fourth quarter, going from 3 cents in Q4 2022 to an estimated 66 cents in Q4 2023. Note also 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
