Decomposing 2023 equity market returns, a large part of the gains can be attributed to valuation re-rating but we see less scope for further re-rating in 2024.
1. US equity markets are increasingly concentrated
The big equity market winners of 2023 were the US mega cap tech stocks. The 'magnificent 7'1 firms drove 88% of the S&P 500’s annual price return, and at the end of 2023 made up 28% of S&P 500 Index market cap2. These firms face a high earnings bar in 2024 given 12-month forward expectations above the rest of the S&P 500 index3. The valuation of the top ten stocks in the S&P 500 also sits around 45% above that of the remaining 490 companies2.
Given these elevated earnings expectations and valuations, investors might now consider rebalancing their equity portfolios based on their investment objectives and risk appetites.
Past performance is not a reliable indicator of current and future results. Forecasts/Estimates are indicative, may or may not come to pass.
3. Source: IBES, LSEG Datastream, S&P Global, J.P. Morgan Asset Management. Manifiencent 7 refers to Alphabet (GOOGL/GOOG), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA). The companies/securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell. J.P. Morgan Asset Management may or may not hold positions on behalf of its clients in any or all of the aforementioned securities. Guide to the Markets - UK. Data as of 31 December 2023.
2. Quality stocks tend to outperform in periods of turbulence
The economic outlook for 2024 remains uncertain. In 2023, inflation receded as energy and food prices eased and central banks increased policy rates. But this fall in inflation could impact currently elevated corporate margins and thus earnings. Growth has been resilient in the US, and real wage growth in Europe is a support looking forward – but still-high interest rates and (in the US) the depletion of Covid era savings could start to weigh on activity more strongly.
Geopolitical tensions might stress supply chains and impact goods prices. In such an uncertain environment, quality stocks – with strong balance sheets, good cash generation, and proven management teams – look attractive, given they tend to outperform in periods of macro turbulence.
Past performance is not a reliable indicator of current and future results. Source: J.P. Morgan Asset Management Quantitative Beta Solutions, S&P Global, J.P. Morgan Asset Management. S&P 500 Quality index is the top quartile quality stocks in the S&P 500 determined by J.P. Morgan Asset Management Quantitative Beta Strategies based on measures of profitability, financial risk and earnings quality. Periods of recession are defined using US National Bureau of Economic Research (NBER) business cycle dates. Guide to the Markets - UK. Data as of 31 December 2024.
3. Income can ballast portfolio returns
Decomposing 2023 equity market returns, a large part of the gains can be attributed to valuation re-rating. This is particularly the case in the US and Japan – the US thanks partly to hopes of AI boosting longer-run earnings potential, and Japan due to corporate governance reforms and an exit from decades of low inflation. However, valuation pick-up occurred across regions, contributing more to equity gains than rising earnings expectations or dividends in European and EM indices too. We therefore see less scope for further re-rating in 2024, which could make income a more important component of portfolio returns. Beyond equities, multi-asset investors might also be looking for alternative income sources given the recent move lower in yields and spreads.
Past performance is not a reliable indicator of current and future results. Source: FTSE, IBES, LSEG Datastream, MSCI, S&P Global, J.P. Morgan Asset Management. MSCI indexes used for Europe ex-UK, Japan and EM. US is S&P 500 and UK is FTSE All-Share. Returns shown in local currency, with the exception of EM which is in US dollars. Data as of 31 December 2023.