Why US shares are attractive plus an outlook for 2024

Support for stock market laggards was highlighted today after a City bank said the current US earnings season left equities “increasingly attractive”.

UBS Global Wealth Management pointed to last week’s 2.5% decline for the S&P 500 index, which pushed the leading US benchmark into 10% correction territory despite encouraging trends in quarterly results.

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Factors other than corporate earnings appear to have fuelled the decline, with the yield on 10-year US Treasuries close to 5% and investment sentiment impacted by the Israel-Hamas war and fears the Federal Reserve might have more work to do on interest rates.

UBS also noted that positioning by leveraged investors in response to the pick-up in volatility had led to strong year-to-date performers being sold and weaker ones being bid up.

The bank said: “This pattern is in line with our recommendation to focus on equity laggards. US equity valuations are becoming increasingly attractive, in our view.”

It said the recent falls mean the US market is now trading at 17 times 12-month forward earnings and 15 times excluding the “Magnificent Seven” of mega-cap stocks. 

Last week was the busiest of the US quarterly earnings season, with about 40% of the S&P 500 market cap reporting. Reactions to mega-cap growth results were mixed, with Alphabet (NASDAQ:GOOGL) and Meta Platforms (NASDAQ:META) trading lower the following day and Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) higher.

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UBS said: “Part of the underperformance is likely explained by investors re-balancing their portfolios. For example, communication services has been the second-best performing sector (behind energy) since the S&P 500 peaked in late July this year.

“Without any single-name commentary, positioning likely became stretched, so unless results blew away expectations, investors may have taken the opportunity to adjust their exposure.”

The analysis found that the percentage of companies so far beating earnings estimates is in line with historical averages at around 73%, reinforcing the bank’s expectations for S&P 500 earnings per share (EPS) growth of 3–4% in the third quarter.

Expectations for US fourth-quarter EPS have been revised lower, by a little over 2%, but around half of that decline is due to one-off non-recurring items.

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UBS’s 2023 and 2024 S&P 500 EPS estimates are for a flat performance of $220 followed by a 9% rise to $240. “We think $240 for 2024 is reasonable, considering that 2023 numbers would be closer to $230, if not for the drag from the energy sector and a sharp decline in Covid vaccine sales.

The bank has maintained its S&P 500 price targets for June 2024 and December 2024 at 4,500 and 4,700 respectively. That compares with 4,167 after a flat first hour of trading in today’s session.

Chief investment officer Mark Haefele said today: “Since the summer, markets have been pressured by higher yields and geopolitical concerns while corporate fundamentals have added support.

“In our opinion, equities are looking increasingly attractive—particularly the laggards.”