US stocks have made a strong start to 2024 (+5%) after a powerful recovery in 2023 (+24%).
The strong advance over the past year has seen the US market P/E lift to 20.3x (1-year forward earnings) compared to 16.7x at the start of 2023.
The current P/E ratio is below the 21.7x we saw around the late 2021 market peak, but is 14% above the 10-year and 6% above the 5-year average.
Technology sector leadership has been a feature of the US market's advance, with mega cap technology stocks surging over the past year. The tech sector is up 53% over the past 12 months, versus 21% for the overall market.
Much has been made of the performance of the so-called Magnificent Seven tech related stocks led by spectacular performance from AI infrastructure player Nvidia (+223%). Shorter term we note more mixed performance from the Magnificent Seven. Tesla is the bottom performer within the largest 20 US stocks year to date, while Apple is also down marginally. Nvidia and Meta have once again been very strong this year, while Amazon and Microsoft have also outperformed the S&P 500 benchmark with double digit returns (see figure 4).
There are a number of notable strong performers evident outside of tech, albeit tech continues to lead the US advance. Best performing non-tech mega caps this year are Elli Lilly, Costco and Mastercard.
| 12 months % | Year to date % | |
| Microsoft Corp | 59.5% | 11.8% |
| Apple Inc | 25.2% | -1.9% |
| Alphabet Inc | 56.8% | 6.7% |
| Amazon.com Inc | 77.6% | 14.8% |
| NVIDIA Corp | 222.9% | 45.7% |
| Meta Platforms Inc | 163.1% | 32.2% |
| Berkshire Hathaway | 29.7% | 11.7% |
| Eli Lilly and Co | 116.6% | 27.0% |
| Tesla Inc | -6.6% | -22.1% |
| Broadcom Inc | 114.1% | 15.0% |
| Visa Inc | 20.5% | 6.2% |
| JPMorgan Chase & Co | 24.6% | 2.9% |
| UnitedHealth Group | 6.7% | -1.6% |
| Walmart Inc | 19.6% | 7.4% |
| Mastercard Inc | 23.6% | 7.4% |
| Exxon Mobil Corp | -11.0% | 1.8% |
| Johnson & Johnson | -2.9% | 0.0% |
| Procter & Gamble Co | 14.9% | 7.4% |
| Home Depot Inc | 15.1% | 4.8% |
| Costco Wholesale Corp | 47.8% | 9.6% |
Source: Refinitiv, Wilsons Advisory.
From a longer-term perspective the tech sector explains a significant portion of the US market’s PE expansion over the last 5 and 10 years though some degree of P/E expansion has occurred across most sectors. This is despite the current 10-year bond yield (4.2%) sitting well above the 10-year average level (2.9%).
While valuation expansion has explained part of the US market’s outperformance versus the “rest of world” earnings growth has also been vastly superior (also led by the US tech sector) and been the dominant driver of the US market’s outperformance over the past 10 years.
The US market has grown earnings at 9.3% p.a. over the last 10 years compared to 4.7% for rest of world. So, while valuations are less demanding outside of tech, earnings growth has been relatively subdued in comparison to the US.
An acceleration in the global economy may well be needed to spark a genuine rotation back to the rest of the world, although we note Japan is quietly having a performance renaissance as investors cheer a shift from deflation to moderate inflation alongside a greater corporate focus on shareholder value creation.
Inflation and Interest Rates: Key Risks for Runaway US Stock Market?
The significant US equity correction in 2022 was driven by a sharp adjustment in interest rates as US and global inflation surprised significantly to the upside.
While a renewed inflation shock is not our central case, the US CPI did surprise to the upside last week. As we also discussed last week, US economic growth does not appear to be undergoing the economic slowdown the consensus has been anticipating.
This does suggest some risk that inflation either gets stuck at current levels, or indeed reaccelerates, rather than the Goldilocks scenario of easing back to the Fed’s 2% target.
While we can’t completely discount a sustained negative surprise on US inflation, the downswing appears reasonably well entrenched in our view, despite the potential for further bumps along the way.
If inflation did ultimately surprise to the upside this year it would likely lead to a significant uplift in interest rates and a valuation correction in US equities. So, inflation prints over the next few months will be closely watched following January’s upside surprise.
Balanced Outlook for US Equities for the Rest of 2024
In summary after a very strong 2023 and a fast start to 2024, we see broadly neutral prospects for US stocks for the balance of the year.
There is some risk of at least a moderate valuation correction in the near term. This could result from some further stickiness in near term inflation numbers, however we still believe that US inflation will decelerate further as the year progresses.
Alongside the positive side of the ledger the recent US reporting season reinforced that the earnings environment looks promising led by the US tech sector.
Valuations do look notionally more attractive outside of the US, but earnings momentum is less appealing. An improvement in growth momentum in the global economy is needed for broader performance from the world excl. the US. Longer term it is still hard to ignore superior growth prospects of the star-studded US equity market.
| EPS growth CY23 | EPS growth CY24 | |
| Consumer Discretionary | 46% | 11% |
| Communication Serv. | 24% | 17% |
| Industrials | 20% | 9% |
| Utilities | 8% | 8% |
| Information Technology | 6% | 16% |
| Financials | 4% | 11% |
| Real Estate | 4% | 3% |
| Consumer staples | 2% | 5% |
| S&P500 | 1% | 11% |
| Healthcare | -21% | 16% |
| Materials | -23% | 0% |
| Energy | -29% | 6% |
Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.
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