The average stock may be about to up its game - Cresset
Main U.S. indexes red: Dow off most, down ~1%
Healthcare leads S&P 500 sector gainers; Tech weakest group
Dollar up slightly; bitcoin up ~4%; gold off <2%; crude off >2%
U.S. 10-Year Treasury yield rises to ~4.24%
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THE AVERAGE STOCK MAY BE ABOUT TO UP ITS GAME - CRESSET
In the midst of surging prices in early 2022, the Fed embarked on its most aggressive rate-hiking campaign in 40 years.
Now, however, with the rate environment expected to evolve in the second half of this year, Jack Ablin, chief investment office and founding partner at Cresset, is taking at look at what the implications are for investors.
Ablin notes that rate hikes have been particularly harsh on the most leveraged companies as investors piled into a handful of mega-cap tech stocks that not only generate generous cash, but also benefit from the AI boom.
Despite some false signals early in the year, Ablin says that investors are now pricing in lower rates thanks to subsiding inflation and a slowing labor market.
"We expect equity leadership to reverse as Fed easing comes closer into view. That’s because lower short-term rates will ease borrowing conditions, and companies, sectors and markets with the highest debt to EBITDA will benefit the most. Moreover, fundamentals are beginning to favor the average stock in the S&P," writes Ablin in a note.
Ablin says that over the last 18 months, the Magnificent 7 stocks have dominated earnings growth – providing more than 50% growth for three straight quarters – while profit growth contracted for the rest of the S&P 500.
However, Ablin says the earnings growth differential between the Mag 7 and the rest of the index is now expected to converge as borrowing costs ease, "creating a catch-up catalyst."
Therefore, Cresset expects lower rates will usher in a broader equity market, as most disadvantaged companies, sectors and markets over the last 18 months close the performance gap with the mega-cap market leaders.
Given their outsized representation in the cap-weighted S&P 500 Index, Ablin thinks it’s possible that the average stock could advance against a backdrop of an index pullback, a situation that he says occurred between 2000 and 2001 when the S&P 500 declined nearly 20%, while the average stock gained nearly 8%.
(Terence Gabriel)
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