Dear Friends,

Global equity markets have drifted lower recently, with North American equity markets retreating from highs. In the U.S., central bank policy easing is expected to continue, but investors have tempered their expectations for how quickly rates will fall amid resilient economic data. This, in addition to shifting election odds, has led to rising bond yields. Below, we provide some quick thoughts on the upcoming elections and discuss some takeaways from the earnings season.

The U.S. election is upon us today. We understand the scrutiny being placed on the presidential candidates and their policies but are mindful of the checks and balances that are built into the U.S. government structure that may constrain the next president from pushing through all of their proposed policies. This was discussed in our firm’s comprehensive report from September.

 

Despite contributing most of the earnings growth for yet another quarter, the elevated valuations of the mega cap technology stocks have left investors with lofty expectations for current and future quarterly results. A couple of companies managed to deliver against these expectations and saw stock gains as a result, while others saw their stock prices fall in response to increased scrutiny around rising levels of capital expenditures tied to artificial intelligence.

Meanwhile, company management commentary across sectors has provided some helpful colour on the operating environment. On the consumer front, a range of financial and consumer businesses continued to characterize the consumer as reasonably stable and resilient despite high interest rates. Some companies expressed optimism about potential tailwinds from lower interest rates, though they were cautious in suggesting that any significant relief will take time. With respect to artificial intelligence (AI), many companies acknowledged strong demand for the required infrastructure to power this technology, like data centers, cloud storage, computing power, and chips, but cautioned that generative AI remains in its early days and that major use cases will take time to materialize. Interestingly, while headline inflation continues to moderate, companies continue to highlight challenges with respect to costs. Lastly, China was referred to as being weak though there is hope that stimulus measures could lead to improvement.

In recent months, sectors outside of technology – such as utilities, real estate, and financials for example, have contributed more meaningfully to U.S. stock market gains. This has been encouraging to see and it suggests investors may be anticipating a reacceleration in earnings growth for stocks across these sectors in the coming quarters. In fact, earnings growth is projected to be nearly 15% next year, far higher than it has been over the past few years. More importantly, it is expected to be fueled by a range of different sectors. We believe this could mark an important and healthy development, should it occur, as it would suggest a broadening in growth with more companies and industries benefitting, providing a constructive backdrop for investors and their portfolios.

Should you have any questions, feel free to reach out.

Best Regards,

Frank