Concentrating on Earnings Perspectives on Profit for Equity Investors

Earnings haven’t been consistently rewarded in equity markets recently. That could change faster than you think.

When seven giant stocks dominate returns, it’s hard for active managers to outperform the market. But we think the pendulum will eventually swing back and more companies with real earnings power will begin to attract the attention they deserve.

Market returns were extreme by many measures in 2023. The Magnificent Seven stocks, a group of giant companies seen to be big winners from artificial intelligence (AI), accounted for 58% of the S&P 500’s returns last year. Only 26% of S&P 500 companies beat the benchmark in 2023—the lowest in more than 30 years (Display). The equal-weighted S&P 500 and MSCI World, which give every index member an identical weighting to better represent what the broader market is returning, underperformed their cap-weighted counterparts by 12.7% and 7.1% respectively in one of the narrowest years on record. Earnings were not the drivers of stock market returns in 2023–instead, it was largely price-to-earnings multiple expansion.

Will More Companies Be Rewarded for Earnings Growth in 2024

AI excitement wasn’t just hype. Investors were drawn to the Magnificent Seven stocks’ potential to monetize the revolutionary technology—an especially attractive proposition in an uncertain macroeconomic environment. These were harsh conditions for active equity managers who aim to diversify holdings, even in concentrated portfolios with relatively small numbers of stocks. While the Magnificent Seven stocks include excellent companies with strong businesses, many active managers are wary of holding the entire group of highly correlated stocks, which comprise about 29% of the S&P 500.