Investment Markets
Putting aside the stellar performance of the “Magnificent Seven”—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla—equity performance has been lackluster in Commonwealth’s opinion.
For example, the small-cap Russell 2000 was up about 4.2%, and the S&P 500 Equal Weight Index was up just 6.56% after a strong November rally. Meanwhile, the S&P 500 was up 20.80%, primarily on the backs of the Magnificent Seven.
“Large-cap growth companies have been leading the market, and other asset classes have been left behind. Is that outperformance going to continue? It may, but there’s already a lot of good news priced into large-cap growth in general,” McMillan said. “What we’ve historically seen is one sector outperforms one year, but then another sector catches up. Are large-caps really going to grow another 30% or 40%, next year?”
That’s not to say investors should sell their M7 shares, he continued. “These companies are highly priced but enormously profitable and not going away. It’s hard to want to jump off a moving train,” he said.
But more attractive investment opportunities will be found in asset classes that have underperformed in the last few years, such as value, small-cap and international, the outlook report said.
That said, each of these areas also have significant challenges. Value stocks, for example, tend to be cyclical and need an expanding economy to perform well. Small-cap companies tend to carry more floating-rate debt than larger companies, and refinancing that debt can strain cash flow. And international economies are also battling inflation pressures, the report said.
Politics and Policy
As the U.S. heads into a presidential election year, the political capital that is gained for either bashing the economy or propping it up may prove irresistible to candidates. But McMillan said if the economy continues its upward trend, American voters may be hard to manipulate next November.
“When you look at consumer confidence in election cycles, there’s a deep bifurcation of perceptions based on politics. But if you look at the at objective facts, there’s a disconnect,” he said.
The major influences on consumer confidence tend to be the unemployment rate and gas prices, and those are felt by consumers on a 12- to 18-month lag, he said. Right now, both are low compared to where they were a year ago, but consumers are just beginning to feel more positively about them.
“Because of that lag we expect consumers to feeling the peak of the improvements in the economy through next year,” McMillan said. “If that relationship holds, we should see consumer optimism continually improve, with people getting more cheerful closer to the election.”