Mitihoon – Dr. Kampon Adireksombat, First Senior Vice President and Team Head of the CIO Office at Siam Commercial Bank, disclosed that in 2023, the US stock market outperformed the global stock market, with the S&P 500 index registering a total return, incorporating both price fluctuations and dividends, of 26.29% compared to the close of 2022. In contrast, the returns for the MSCI ACWI and MSCI World indices, representing the global stock market, stood at 22.20% and 23.79%, respectively.
Looking into specifics, the robust returns in 2023 were primarily attributed to two main factors: 1) a surge in the stocks of seven major technology companies known as the “Seven Angel Stocks,” which include Apple, Amazon, Alphabet, NVIDIA, Meta, Microsoft, and Tesla. This group of stocks yielded an impressive total return of 78.09%, constituting more than half of the S&P 500’s annual return. Excluding these seven large companies, other listed firms in the S&P 500 contributed a return of 12.30%, accounting for only 10.97% of the S&P 500’s overall return. 2) Market expansion was widespread, particularly in the fourth quarter of 2023, driven by signals from the Federal Reserve indicating a relaxation of the policy interest rate adjustment. Consequently, bond yields experienced a sharp decline, propelling the S&P 500 index upward.
However, despite the exceptional growth in technology stocks within the US stock market, the SCB CIO has adopted a more cautious outlook. There is anticipation that US GDP growth is transitioning into a “soft landing” phase, characterized by a gradual slowdown. The rate of US economic growth peaked in 3Q23 and is expected to decelerate from 4Q23 to 2Q24, before picking up pace again in the second half of 2024. Analysts have initiated downward adjustments to profit forecasts for listed companies in the upcoming period, prompted by increasingly negative guidance from executives of companies listed on the US stock market.
Furthermore, valuations are beginning to tighten, posing limited possibilities for re-rating valuation compared to the expected growth rate in 2024. We have observed that analysts providing optimistic target prices estimate an average S&P 500 earnings per unit growth (EPS) of 8.6%, coupled with an average 12-month Forward Price-to-Earnings ratio of 21.1x, a scenario we consider somewhat improbable. As pricing and market sentiment enter the “Greed” zone, there is increased vulnerability to risks stemming from heightened expectations.
Simultaneously, businesses demonstrating the ability to generate substantial profits have already been assigned a reasonable “Premium” value. In 2023, market projections indicated that S&P 500 profits were not anticipated to grow compared to the previous year (YoY). Instead, growth was expected to be concentrated in stocks belonging to the Quality Growth category, such as the “Seven Angel Stocks,” which are projected to achieve a remarkable 33% YoY growth. In contrast, the S&P 500 was forecasted to experience profit growth within the 0-1% YoY range. However, a majority of investors acknowledge the potential for superior profits of this select group of companies. This is evident in the concentration of market capitalization in technology stocks compared to the S&P 500, underscoring the market’s inclination to assign premiums to industrial groups reminiscent of the Tech Bubble in 2000.
Dr. Kampon emphasized that, considering these factors, SCB CIO has revised its recommendation for the US stock market from Slightly Positive (Gradually Invest) to Neutral (Hold). This adjustment stems from tightening valuations and a more limited upside opportunity, especially following the S&P 500 index’s continuous ascent over the last nine weeks of 2023. The swift upswing suggests that investors are factoring in an anticipated policy interest rate cut, with market expectations pointing toward approximately six rate reductions in 2024. According to the SCB CIO’s perspective, the latest economic and inflation data for the United States indicate that the Fed is likely to reduce interest rates in the third quarter of 2024, with a total of three cuts expected in 2024. This situation implies a short-term risk of correction for the US stock market if the Fed’s rate cut falls short of market expectations or if economic growth slows down more rapidly than anticipated.
Nevertheless, we maintain the view that the US economy is still experiencing a soft landing trend and that the labor market will remain robust. The US stock market comprises “High Quality” stocks, presenting significant potential for long-term growth. Consequently, we recommend waiting for strategic timing to accumulate positions when valuations are less constrained and at a more favorable price level.
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