Insights into key market performance and economic trends from Dan Kemp, Morningstar’s global chief research and investment officer.
In a big week for economic data, the picture painted for investors was one of slower economic growth and stickier inflation. US first quarter GDP growth was 1.6%, compared to a forecast of 2.2%, and PCE inflation was 2.8% over the last 12 months, compared to an expectation of 2.7%. While this may appear to be bad news for investors, they seem relieved that the situation is not worse. This reminds us of the importance of expectations in determining short-term price movements. However, the impact of these volatile expectations fades as time passes and the fundamental returns of the asset classes in which we invest become more important. It is for this reason that investment is always a long-term pursuit.
Earnings Season Winners and Losers
As we approach the midway point in the US quarterly earnings season, we have started to receive updates from the large technology focused companies that were ominously christened the ‘Magnificent Seven’ last year. Microsoft, Alphabet, Meta and Tesla, and have already reported while Apple and Amazon are expected to report this week (Nvidia reports later in May). Stronger-than-expected results encouraged analysts to raise their expectations for future growth and led to the Morningstar US Technology and Communication Services index rising 4.52% over the week. AI continues to be a key differentiator among this group. While investors appeared to welcome further investment in this area by Microsoft and Alphabet they remain concerned about higher spending by Meta. You can catch up on the latest earnings reports from Morningstar equity analysts on this dedicated page.
Will China’s Unloved Stocks Surprise Investors?
Expectations have also played a strong role in markets outside the US with concerns about economic and geopolitical challenges in China weighing on investors’ minds over the last few years, leading to a 42% decline (-47% in US dollar terms) in the Morningstar China index from the end of 2020 to the start of 2024. Now most of the companies that dominate that index now appear attractively valued to Morningstar’s equity analysts in the region. Many of these are high quality businesses which Morningstar analysts expect to deliver attractive returns for investors over the long term (evidenced by their economic moat rating). However, this market appears to be gaining more attention given the 11.19% rise in prices over the last three months, reminding us of the benefits of searching for value in unloved parts of the capital markets. Morningstar’s Investment Management team outlined the attractions of the Chinese equity market (and how to address the risks) last year in this article and continue to see opportunity, evidenced by the recent Global Convictions document.
Expect No Surprises from the Federal Reserve
The big event this week is the latest interest rate decision from the Federal Reserve on Wednesday. According to CME’s FedWatch, there is a 97.6% probability that interest rates will remain unchanged. Consequently, any other outcome would provide a significant surprise that could lead to significant volatility. As ever, Fed Chair Jerome Powell’s comments will be closely scrutinised by investors seeking hints of the future path of interest rates. While such speculation provides work for financial commentators, it should be of limited interest to investors with well-structured portfolios who can look a little further ahead.
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