Brighter outlook for US earnings
Having faced a US earnings ‘recession’ in 2023 – where corporate profits fell for three straight quarters – US companies finally have an improving outlook for earnings growth. As mentioned before, the US economy has shown resilience despite rising interest rates. And, equally, companies are starting to show promising signs of growth for the year ahead.
Brighter outlook for US earnings
Having faced a US earnings ‘recession’ in 2023 – where corporate profits fell for three straight quarters – US companies finally have an improving outlook for earnings growth. As mentioned before, the US economy has shown resilience despite rising interest rates. And, equally, companies are starting to show promising signs of growth for the year ahead.
Brighter outlook for US earnings
Having faced a US earnings ‘recession’ in 2023 – where corporate profits fell for three straight quarters – US companies finally have an improving outlook for earnings growth. As mentioned before, the US economy has shown resilience despite rising interest rates. And, equally, companies are starting to show promising signs of growth for the year ahead.
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Higher profits on the horizon?
History tells us that, following earnings downturns like the one in 2022, profits tend to rebound. Typically, companies cut costs when they see their earnings fall. Hence, when economic conditions improve, they see higher profits.
Consumers still feel the squeeze
However, it may not all be smooth sailing as there are signs people are still feeling the pinch when it comes to their money. For example, the University of Michigan Consumer Survey shows consumer sentiment remains fragile. In November, 46% of the survey’s respondents said they were worse off financially than a year ago, versus 28% saying they were better off, with the principal factor being higher prices.
Consumers still feel the squeeze
However, it may not all be smooth sailing as there are signs people are still feeling the pinch when it comes to their money. For example, the University of Michigan Consumer Survey shows consumer sentiment remains fragile. In November, 46% of the survey’s respondents said they were worse off financially than a year ago, versus 28% saying they were better off, with the principal factor being higher prices.
Key performers
The investment side of the economy looks in better shape for some, however. After a year of recovery in 2023, there are high expectations for some sectors this year.
Mega-cap tech
Large technology firms continued to spend heavily last year to keep up with the demand for artificial intelligence (AI). The so-called Magnificent Seven (Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta and Tesla) did very well off the back of the excitement around AI, accounting for nearly all the positive investment performance of the S&P 500 in 2023.
Healthcare
This defensive sector is expected to be one of the major contributors to US earnings growth in 2024. Healthcare demand is beginning to normalise following the disruption of the Covid-19 pandemic. Excitement grew around new, injectable GLP-1 treatments for diabetes and obesity after successful clinical trials. This, along with several celebrity endorsements, drove growth expectations for next year.
FINANCIALS
At the other end of the performance spectrum, expectations are low for the financial sector. Having witnessed severe challenges in 2023, such as the collapse of Silicon Valley Bank, the sector faces further issues such as slowing loan growth, rising credit concerns and increased competition.
Mega-cap tech
Large technology firms continued to spend heavily last year to keep up with the demand for artificial intelligence (AI). The so-called Magnificent Seven (Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta and Tesla) did very well off the back of the excitement around AI, accounting for nearly all the positive investment performance of the S&P 500 in 2023.
Healthcare
This defensive sector is expected to be one of the major contributors to US earnings growth in 2024. Healthcare demand is beginning to normalise following the disruption of the Covid-19 pandemic. Excitement grew around new, injectable GLP-1 treatments for diabetes and obesity after successful clinical trials. This, along with several celebrity endorsements, drove growth expectations for next year.
FINANCIALS
At the other end of the performance spectrum, expectations are low for the financial sector. Having witnessed severe challenges in 2023, such as the collapse of Silicon Valley Bank, the sector faces further issues such as slowing loan growth, rising credit concerns and increased competition.
UK behind the curve
UK equities in a post-pandemic, higher-rate environment, are falling behind their global peers. This may seem surprising given how much of the largest companies in the FTSE 100 and MSCI UK depend on international activity and overseas earnings. This could be down to the breakdown of sector dominance in the region.
UK behind the curve
UK equities in a post-pandemic, higher-rate environment, are falling behind their global peers. This may seem surprising given how much of the largest companies in the FTSE 100 and MSCI UK depend on international activity and overseas earnings. This could be down to the breakdown of sector dominance in the region.
SECTOR DIFFERENCES - US VS UK
As you can see in the table below, there are some significant differences in the weighting of sectors in the MSCI UK compared to its US counterpart.
Technology, for example, performed well in the US last year, but accounted for less than 1% of the MSCI UK. On the other hand, financials – including banks that had a tough 2023 and face low expectations this year – accounted for more than 18% of the MSCI UK.
The ongoing absence of higher growth sectors, in particular technology, drives the disparity in performance. And as far as the make-up of the market is concerned, that position looks unlikely to change.
What lies ahead for UK investors?
A re-rating of the market is reliant on a move back to more value-style investing. The forward-looking investor will be more attracted to the US market compared to the UK. But opportunities will arise in the UK when confidence around the Bank of England’s policies and the overall economic direction improve.
For now, investors will be focusing on locking-in above average dividend yields at cheap buy-in prices.
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