Key Questions at the Midpoint of 2024

How are you evaluating the current investing landscape?

As we move into the second half of the year, one of the most encouraging signs is that the economy seems to be broadening. While the economy may not be overtly strong, we are at least seeing more areas improve, whereas the last year or so has largely been a story about Growth/Technology and, to a certain degree, policy support. It's encouraging for us to see inflation remain relatively anchored, central bankers shifting toward easier policy, and corporate earnings begin to strengthen and broaden. At the highest level, it’s a bullish signpost to see organic drivers of growth start to manifest in an economy that has been perhaps too reliant on government stimulus over the last number of years.

Inflation is still too high but look anchored

How do you see the path of inflation and interest rates evolving?

Since the onset of the pandemic, we’ve watched not just the rate of inflation, but the volatility of inflation expectations. At this point, I think the Federal Reserve can take some satisfaction in its adjudication of inflation over the last couple of years. It appears to be anchored for now, and a global rate-easing cycle is emerging, starting in Europe, as a result—with signs that the Fed will join in easing this fall. There’s still concern that inflationary pressures are still in the system and are higher than the Fed would like. But as a precondition for economic growth, the variability of inflation will inform interest rates. And the building blocks of stock prices are corporate earnings and interest rates, so all else equal, a less volatile inflation backdrop should lead to lower interest rates, and that should generally be taken as bullish for stocks.

The Fed is on path to cut interest rates

What is your outlook for corporate profitability?

Strategas believes that the S&P 500 will be able to grow corporate profits +8% in 2024 and +10% in 2025. An accelerating growth rate with broader participation equates to a stronger earnings profile—a backdrop against which the stock market can move higher. For almost two years, aggregate corporate profits were bolstered by Growth, Technology, and AI-adjacent companies, but there was atrophy from other sectors keeping them rangebound. That ended in Q1 2024 when aggregate corporate earnings broke out to a new cycle high, and we see evidence of follow-through strength. For one, companies’ earnings have lived up to analyst expectations for the last three quarters. Stock valuations are somewhat rich, but not outlandish compared to estimates of earnings growth.

Earnings expectations are heading higher

What are your highest conviction investing themes going forward?

While the last couple of years have been dominated by just a handful of stocks, most notably the Magnificent 7, I do think that a more granular portfolio construction may provide some benefit over the next few years. There are four themes right now that we think offer some opportunities:


This may have been more of an academic construct prior to Russia's invasion of Ukraine, but we now see this as an all-encompassing theme for the next several years, if not several cycles. In our view, it will impact everything from supply chains to resource allocation and procurement to industrial technologies and power.


Artificial Intelligence

This theme checks the box for what we might call an organic driver of growth. AI may not be quite ready for primetime—the business use case may still be in development. But ultimately, corporate operators seem inclined to put capital to work to try to understand how AI can benefit their businesses. That will very likely dominate the landscape for the next few years before we start to see some of the productivity gains that can accrue from this technology.
More companies are citing AI


Industrial Power Renaissance

Related to AI is the growing attention on how we procure power, how much demand for power we have, and what sources of power will ultimately be used. We think this has broken out as a theme unto itself, to say nothing of the massive power needs of AI. As the global economy expands and evolves, much more focus will go toward sources and types of industrial power.


Cash Flow Aristocrats

Even as global monetary policymakers begin to ease interest rates, we want to be mindful that the cost of capital is high. To the extent to which interest rates remain elevated, companies that have strong cash flow ultimately have more optionality. There are really seven things you can do with cash: 1) Pay dividends; 2) Buy back shares; 3) Retire debt; 4) Acquire another company; 5) Engage in capital expenditures (e.g., build a factory); 6) Pay labor; or 7) Retain earnings.
Interest rates are structurally higher than last decade


In a high cost of capital world, companies with strong cash flow very much remain in the driver's seat of optionality. We would want to look to those operators as opportunities in portfolio construction.

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