Quality stocks underperforming
Torsten Slok has another very interesting graph this morning showing how companies in the US with negative EPS are doing better than companies with positive EPS. Can you explain what the heck is going on there?
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Answer
Hi Bill,
Markets price future earnings potential rather than earnings today. Investors buy loss making companies because they believe future earnings will come, and at high rates. This obviously carries more risk, but can also have more upside if the analysis proves on point. When risk appetite is high and the economic backdrop strong, best returns can actually come from taking on most risk, and we think that what’s driving the theme you are highlighting.
Looking over a longer time period though – Since COVID – the S&P 500 has significantly outperformed the Russell 2000 small-cap Index, and if we concentrate these gains even further to the Magnificent Seven, the outperformance has been even more dramatic. The point here is that over time, share prices follow earnings, and that’s what we should focus on.
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US S&P 500 v Russell 2000 small-cap Index
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US S&P 500 v Russell 2000 small-cap Index
