What will the stock markets do in the second semester of 2024? Investors are asking themselves this question, and Marc Pinto, head of Equity for America at Janus Henderson, and Lucas Klein, head of Equity for Europe and Asia at the same firm, have some insights to share.
They acknowledge the persistently high interest rates and the inverted Treasury yield curve – a historically reliable indicator of a recession in the US – which have kept the possibility of an economic slowdown alive.
However, overall, they believe that their outlook for the equity markets in 2024 has not changed significantly. They are encouraged by many of the secular trends they are observing, and they believe that opportunities for equity investors focused on fundamentals may be increasing.
EXPANSION OF ARTIFICIAL INTELLIGENCE
One key factor driving their optimism is artificial intelligence (AI), which is powering major American tech companies but can also extend to other listed companies. They point to the utilities sector as an example, benefiting from positive forecasts for data centers that train and host AI generative programs, which will account for 8% of electricity consumption in the US by 2030, up from 3% in 2023.
This is expected to drive significant investment in energy infrastructure, increasing the long-term profit growth potential of these companies. They see similar stories beginning to unfold in other areas of the economy, leading them to believe that AI is still in its early stages. Therefore, they suggest that large-cap tech companies investing and innovating in AI could experience higher revenue and free cash flow growth.
In addition to positive forecasts for Microsoft, Alphabet, Nvidia, Meta, Amazon, and Apple, they also anticipate that second derivative AI players, such as advanced chip manufacturers and semiconductor equipment makers, companies offering sustainable water management systems for data centers, energy and electrical component suppliers, will receive a significant positive impact on their profit streams.
EXACERBATED VALUATION DIFFERENCES
The experts at Janus Henderson acknowledge that valuation differences between big US tech and the rest of the market have «exacerbated» because the valuation multiples of these companies and their premiums have increased even further. However, they note that fundamentals are becoming more positive in other markets and believe that there is potential for stocks to rise more consistently overall.
Regarding European stock markets, they suggest that positive momentum may continue, as Europe has also developed its own group of large-cap leaders in sectors such as healthcare, semiconductors, and retail. They also highlight that a 62% increase in military spending over the past decade is inflating the order books of European defense contractors.
OPPORTUNITIES BEYOND THE ‘MAGNIFICENT 7’
Discussing opportunities on Wall Street outside of the ‘Magnificent 7’, they recommend focusing on high-quality companies whose growth is not dependent on the economic cycle, can generate strong free cash flow, and have reasonable levels of debt. They point to the US healthcare sector, including pharmaceutical and biotechnology companies.
In conclusion, Marc Pinto and Lucas Klein emphasize that the outlook for equities remains positive, and they highlight that the shareholder value potential has become more compelling in various areas of the global market.
