In-depth Analysis

Are we seeing a regime change in US equity markets?

Over the last couple of weeks, many US companies have reported Q3 earnings and we have seen more than our fair share of positive earnings surprises, though it is also true to say that the earnings growth rates, among US stocks, are slowing. Among the broad sweep of earnings releases, we have heard from the likes of Meta Platforms (formerly Facebook), Amazon, Alphabet, and Apple, which are among the world’s largest businesses.

However, the earnings news from these companies hasn’t been great, nor has it been well-received by the market.

As we can see in the table above, which tracks the performance of the so-called FAANG stocks. The last few months and weeks have been a pretty torrid time for the share prices of the group other than Netflix, which has restructured its business model this year for which its stock price has been rewarded.

As a consequence, we are seeing a divergence in the performance of US equity indices

 

The narrowly focused Dow or US 30 index, which is predominantly made up of old economy stocks, rather than tech and growth, is outperforming both the S&P 500 and the Nasdaq 100 indices.

Though in truth this isn’t a new phenomenon, it’s been playing out over the last month, if not longer. However, in recent days it’s become more noticeable.

A rising interest rate environment doesn’t favour growth stocks and that’s been reflected in  Wall Street analysts’ earnings estimates and stock recommendations.

Growth stocks are firmly out of favour and have attracted substantially more earnings downgrades, than other comparable groups as we can see below.

Growth stocks are no longer growing 

Not only have analysts seemingly turned their backs on the stocks that led the market higher post-lockdown, but investors have also looked elsewhere to generate returns.

As a consequence energy and mineral resource-related sectors, and, not technology and growth, are the best performers over the year to date.

Whilst automobiles, including the EV manufacturers (Tesla is down -36.0% YTD), the internet, utilities and real estate are the worst-performing sectors in 2022 thus far.

The best-performing large-cap stock in the US, during 2022 is Occidental Petroleum (OXY). This has been boosted by higher oil and gas prices, and significant stakebuilding in the company, from the ultimate value investor, Warren Buffet, who bought another 5.99 million shares in the business, in September.

Contrast that performance with one of the leading US tech companies, Meta Platforms (META) which is among the worst-performing large-cap stocks in 2022.  Its shares are down by 71.0% in that time frame.

In summary, the leadership in the US stock market has shifted away from the growth and technology memes, that drove the market higher for almost 20 months.

Mega cap techs, which had been able to maintain earnings growth are also now faltering. And earnings disappointments are being punished. Amazon’s stock price fell as much as -20% when it reported earnings and guidance below forecasts.

The post-Covid world is a very different place both socially and economically, investors are coming to terms with this fact and are finding new homes for their money.

Some businesses, like Netflix, are modifying their operations to reflect these socioeconomic changes. Whilst others, such as Meta Platforms are realising that their change of direction isn’t working.

For traders that means that we can no longer treat and think of US equities as a single asset class instead we will need to get back in touch with the stock-picking side of our trading personas.

 

 

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