The triumph of big, boring stocks

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FT editor Roula Khalaf selects her favourite stories in this weekly newsletter.

Good morning. I consider July 4th to be a holiday that celebrates the founding of my country and also marks the midpoint of the year. So today I’m taking a look back at the big themes of the first six months of 2024. Unhedged will not be published for the rest of the week. See you on Monday. Send patriotic messages to Robert.Armstrong@ft.com.

The other rally of 2024

Unhedged has spent a lot of time complaining about the state of the market. only growing Because of AI stocks. And indeed, non-AI stocks in the S&P 500 are down a bit so far this year, but within that non-AI sideways market there are some great success stories. The biggest one is the absolute decline that big, boring, consumer staples companies have experienced this year:

Not all of them have outpaced the S&P 500’s 16% gain so far this year, but in a market without AI that is holding steady, they have done very well. The performance is particularly surprising given that several of them have not grown their revenues at the pace of inflation in recent years (Kimberly-Clark and Altria) and only three of them (Costco, Walmart, and Colgate) are expected to post double-digit earnings growth over the next two years. Bargain hunting is not the theme here either: Costco, Walmart, Colgate, Procter & Gamble, and Church & Dwight all started the year at large valuation premiums to the market. Investors, when they are not chasing the AI ​​story, are very interested in non-cyclical commodity safety. What are we to make of that?

What mattered in the first half

When you write a thousand words about finance every workday, things get a little confusing. Sometimes I feel like I’m the one Claude Fredericks of finance, keeping an endless journal about what stood out on a particular day, all of questionable long-term importance. But in reading the newsletters for the first half of this year, I found certain themes that came up again and again, and they really struck me as significant. Here they are, in no particular order:

• The rise of the AI ​​bubble (see here, here, here, here and here). We know that AI and big language models are going to be very important technologies. What we don’t know is what the businesses built around them will look like, how the competitive dynamics will play out, and who the winners and losers will be. The market has decided that the profits will be high and that the big winners of this latest technological revolution will be the same as the big winners of the last one (Apple, Alphabet, Amazon, Meta, and Microsoft), plus the current leader in the GPU chip market (Nvidia). There is some logic to this: these companies have the financial muscle, customer bases, and processing power to block startups. But things happen.

• Fiscal deficits and capital flows may be the key to a long bull market (here, here and here). We like to think that the value of the stock market is ultimately determined by rational agents constructing optimal portfolios in which to store their savings. As a second explanation, we often turn to monetary policy. But the reality may be that deficit spending and capital desperate to enter the United States (which are often two sides of the same coin) have been the main drivers of both earnings growth and valuation expansion.

• American Exceptionalism (here, here, here, here, here and here). The biggest and best trade of the past 15 years or so has been to buy and hold U.S. stocks, almost without regard to the specific asset. What caused this to happen, and how long can it last?

• The most important signal is employment (here, here and here). It is a uniquely American luxury that we have too much data about our economy, rather than too little. The challenge is knowing what to focus on and what to dismiss as noise. A North Star is needed. For those who care primarily about markets, and therefore about things like business cycles and recessions, that North Star is the labor market.

• While the US economy has held firm in the face of tighter monetary policy, there is real pain among the poorest and most indebted households. (here, here, here and here). This is important on several levels. In combination with the poor housing situation, affordabilityThis helps explain why consumer confidence remains poor in a context of a broadly sound economy and suggests that monetary policy could eventually affect the rest of the economy.

• The high returns of the current asset class, private credit, are not well understood. (here, here and here). As with private equity, it stands to reason that well-managed private credit investments can earn slightly higher long-term returns than their public counterparts, because they are not subject to the worst of the public markets. But are those higher returns absorbed by high fees? Can they survive the flood of assets heading into the industry? Has a long, benign credit cycle allowed less well-managed funds to hide large risks, generating what amounts to “false” returns that will disappear when credit risk returns? We have much to learn.

Do you have any ideas about what will be important in the second half? Send me an email.

A good read

The dogs are good.