Earnings Growth Patterns Are Changing
So what should investors look for? It depends on your investment philosophy. Growth investors can target companies with clear business advantages to support profits that exceed the cost of capital—a robust indicator of consistent growth potential. After languishing for years, value stocks also deserve attention, as the style has shown signs of life, and many investors are underexposed.
In Europe, despite hurdles to economic growth, individual company earnings still matter most for equity returns, in our view. Our research shows that European equity returns have closely tracked long-term earnings growth over time, and companies with stronger earnings than the market tend to be rewarded.
Emerging markets, too, are presenting diverse opportunities from AI in Taiwan to Greek bank recoveries. Even in China, incentives for companies to boost dividends could support equities. The Chinese economy remains hamstrung by a distressed property sector and sluggish growth, but new rate cuts and stimulus measures to support the equity market unveiled in September could add an impetus for select investment opportunities.
And as the recent bout of market unease reminds us, lower-volatility securities should be an important part of a robust equity strategy. The key is to focus on businesses with consistent performance patterns and attractive valuations, which can help cushion losses in a downturn and bolster confidence to stay invested through turbulence.
Do US Elections Matter?
Many investors expect stock markets to be unstable ahead of US elections in November, especially given the polarization of US politics. However, our research of forward volatility contracts suggests November isn’t expected to be a particularly turbulent month.
Even if investors could project the winner, it wouldn’t necessarily help much. In a historical perspective, the political party of the US president hasn’t made a material difference to equity returns. Since the global financial crisis, the S&P 500 has posted healthy long-term gains under three different presidents, though policy decisions have had periodic effects on market returns (Display).
