Chart of the Week - Earning Power
The obvious trend in tech earnings vs the non-obvious trend in non-tech...
Brief note this week as a lull between Christmas feasting and family time fun presents an opportunity to share what I reckon might be one of the most interesting charts of the year.
The blue line is probably no surprise — US tech stock prices have been powering ahead driven by a mix of hype and fundamentals (earnings).
We probably all know by now how much of the strength in the S&P 500 index has been driven by big tech, but this also carries across to earnings.
On the other hand, non-tech stock earnings have seen almost a 3-year period of stagnation. In real CPI adjusted terms it’s a full-on earnings recession (the below chart is in nominal terms). No wonder ex-tech have been lagging behind. And no wonder tech have been leading the charge.
But I’ll leave you with an open question before I get interrupted by little footsteps scurrying down the stairs — which of the lines in the chart below has the biggest scope to surprise? (up or down)
Key point: It’s a tale of both boom and bust in US corporate earnings.
ICYMI: Topdown Charts End of Year Special Report
UPDATED: here’s an update to that Tech vs non-tech *valuations* chart — as you might guess from the chart above, tech stocks trade at a significant premium vs non-tech and vs history.
While some of this may well be justified given the extraordinary path of earnings, these things move in cycles.
Valuations in this context are more of a measure of confidence, and a barometer of speculative appetite — a guide point for where we are at in the market cycle. In this respect I would say we are at the overconfidence phase as folk extrapolate past trends infinitely into the future, spurred on by easy monetary/fiscal policy, and emboldened by a procession of bull markets. This is the part where price begins to overshoot against even the best of fundamentals.
Topics covered in our latest Weekly Insights Report
Aside from the chart above, we looked at several other charts, and dug into some intriguing global macro & asset allocation issues on our radar:
Global Markets Update: equities, rates, FX, commodities
Macro Technicals: moves to monitor in key macro markets
Risk Radar: what to keep an eye on
End of Year Special: what worked, what didn’t
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Callum Thomas
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To me, this is one of your best charts. It highlights the imbalance in the US equity market. Why are these tech companies out performing so much? In part because they're investing in generative AI semiconductors and application software, using their strong cash balances to buy each others offerings. Works well, if end demand is there. Turns into a disaster for them if not….
“which of the lines in the chart below has the biggest scope to surprise?”
Such an awesome question, and probably one you should poll. I’m going to vote the Blue line, which is why I am still a BUYER at these lofty price to earnings multiples.