The Morningstar US Market index ended the week 3.06% lower with large technology companies leading the decline, exemplified by the 14.5% fall in the price of Nvidia NVDA. Consequently, Morningstar equity analysts believe that the US equity market to be 2% undervalued.
Although equities are undoubtedly more attractively priced now than they were a few weeks ago, prices fluctuate widely around fair value and so this most recent changes in stock prices should not be seen as indicative of the need to make adjustments to the portfolio.
Looking more broadly at global capital markets, most equity and bond markets appear to offer normal returns to investors.
As a consequence, investors can create a diversified portfolio without sacrificing expected returns. More information about which global assets are currently favoured by Morningstar’s Investment Management team can be found in the recently published quarterly convictions document here.
Will Tech Stocks Lead Earnings Season?
As we move deeper into the US corporate reporting season, analysts are forecasting a bifurcated outcome with the largest technology companies delivering strong profit growth while the remainder of the market is expected to report a decline in profits (Source: FactSet).
Given the concentrated nature of the commonly used benchmark indexes, it is likely that the contribution of the technology companies will lead to overall profit growth. However, this concentration also creates vulnerability to disappointment among investors leading to concern about the health of the US economy.
Given the likelihood of these competing narratives, it is more than usually necessary to focus on the fundamental characteristics and valuations of individual businesses. To help you do this, Morningstar has a dedicated companies earnings page which you can access here.
Why Invest in Bonds?
As expectations of interest rate cuts continued to weaken treasury bonds become more attractively priced as both a source of returns and as a source of portfolio diversification in the event of weaker than expected economic growth. However, when investing in bonds, it is essential to know why you own them. Investors who fail to specify their role in a portfolio run the risk of achieving neither the returns or diversification sort as they do not properly organise the remainder of the portfolio to create the desired outcome.
Beware, Competing Stories Ahead!
The week ahead is likely to be an obstacle course for investors with a slew of economic and company data against a volatile macroeconomic backdrop. Most prominent among these is likely to be the latest economic growth data on Thursday and the latest inflation data on Friday. Stronger-than-expected outcomes are likely to fuel speculation that interest rate cuts will be further delayed and cause further volatility in asset prices.
With so much news, it is likely that every movement of asset prices will be attributed to a piece of data to create a narrative among investors. Such narratives are harmful as they fool us into believing that we can successfully predict near term movements in markets and encourage us to chase after short term trading profits rather than accessing the rewards that good businesses provide to their owners over the long term.
