The triumph of big boring stocks

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Good morning. I think of the Fourth of July as a holiday that celebrates my country’s founding, and also marks the year’s midpoint. So today I look back on the big themes from the first six months of 2024. Unhedged is off for the rest of the week. See you Monday. Send patriotic messages to Robert.Armstrong@ft.com. 

The other 2024 rally

Unhedged has spent a fair amount of time whining about how the market is only rising because of AI stocks. And indeed the non-AI stocks in the S&P 500 are, in aggregate, down a bit for the year. But within that sideways non-AI market, there are big success stories. The biggest is the absolute tear that very large, dull, consumer staples companies have been on this year:

Not all of these have beaten the S&P 500’s 16 per cent year-to-date increase. But against a flat non-AI market, they have done very well indeed. The performance is particularly striking given that several of them have not increased 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 in next two years. Bargain hunting is not the theme here, either: Costco, Walmart, Colgate, Procter & Gamble and Church & Dwight all started the year out with big valuation premiums to the market. Investors, when they are not chasing the AI story, are very interested in the non-cyclical safety of staples. What are we to make of that?

What mattered in the first half

When you write a thousand words about finance every working day, things get a bit blurry. It feels at times like I am the Claude Fredericks of finance, keeping an endless diary about what stood out on a particular day, all of questionable long-run importance. But reading through the newsletters from the first half of this year, I did find certain themes popping up again and again, and they do feel meaningful. Here they are, in no particular order:

• The rise of the AI bubble (see here, here, here, here and here). We know that artificial intelligence and large 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 shake out, and who the winners and losers will be. The market has decided the profits will be high and that the big winners in this latest technological revolution will be the same as the big winners in 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 economic muscle, customer bases and computing power to block upstarts. But things happen.  

• Fiscal deficits and capital flows may be the key to the long bull market (here, here and here). We like to think the value of the stock market is driven, in the final analysis, by rational agents building optimal portfolios in which to stash savings. As a second explanation we often fall back on monetary policy. But the reality may be that deficit spending and capital desperate to get into America (which are often two sides of the same coin) have been the biggest drivers of both profit growth and expanding valuations. 

• 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 America, almost regardless of 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 suffer from too much, rather than too little, data about our economy. The challenge is knowing what to focus on and what to dismiss as noise. One needs a north star. For those who care mainly about markets, and therefore things like business cycles and recessions, that north star is the labour market.

• As well as the US economy has held up in the face of tighter monetary policy, there is real pain among poorer, more indebted households (here, here, here and here). This is important at a number of levels. In combination with terrible housing affordability, it helps explain why consumer sentiment remains poor in the face of an economy that is quite strong in aggregate. And it suggests that monetary policy might bite the rest of the economy eventually.

• The high returns for the asset class of the moment, private credit, are not well understood (here, here and here). As with private equity, it makes sense that well-managed private credit investments should be able to earn slightly higher long-term returns than public equivalents, because they are not subject to the worst vicissitudes of public markets. But are these higher returns absorbed by high fees? Can they survive the rush of assets into the industry? Has a long, benign credit cycle allowed less-well-run funds to conceal big risks, generating what amounts to “fake” returns that will disappear when credit risk returns? We have much to learn.

Have thoughts on what will matter in the second half? Email me. 

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