“Stocks love booms.” And fiscal largesse is conducive to nominal booms.
Makes you wonder why anyone would’ve been bearish. But I digress already.
The quote is from BofA’s Michael Hartnett, a self-described “patient bear.” Being a bear since the October lows has required the patience of a saint. Or the luxury of no PNL pressure.
Three-year nominal GDP growth in the US is on track for 40%. As the figure on the left below shows, booms of that magnitude occurred only two other times in modern American history. The S&P rocketed higher in all three cases.
US shares have returned nearly 115% since the COVID panic lows. That’s better than US stocks’ return from 1975 to 1978 and just short of the returns seen from 1949 to 1952.
While the read-through of this GDP boom for equities as an asset class was similar to that during previous booms, this time is different under the hood.
“In the prior two nominal booms value outperformed growth stocks by 45ppt and 105ppt,” Hartnett remarked. We’ve seen the “complete reverse” over the past three years, with value underperforming by 27ppt.
There’s no mystery: Notwithstanding a famine in 2022, big-cap US tech feasted in 2020, 2021 and 2023.
That speaks to our reality: Even in a macro environment that should favor value — indeed, even if the macro regime shifted entirely, requiring higher rates to keep the economy in equilibrium — it doesn’t change the fact that each and every day, a huge majority of global citizens rely on the products and services of large technology companies for everything from navigating to eating to dating to optimizing an exercise routine.
When it comes to long-duration equities, it’s not just about discount rates anymore. It’s about “How does humanity go about making it through a day?” The answer to that question for untold billions is “With tech.” Life is now “Brought to you in part by Amazon, Apple, Google, Meta and Microsoft.”
In any case, Hartnett went on to caution on bad breadth associated with growth stock dominance. For the MSCI All-Country World gauge, breadth is the narrowest in two decades, he said.
