Welcoming in a More Discerning Market

Matt Freund, CFA, Michael Kassab, CFA

Summary Points:

• A resilient US economy and a more supportive Fed create a hospitable environment for growth stocks.
• Market participants are becoming more discerning regarding individual security fundamentals.
• Emerging themes from 2023 have multidecade potential, and we continue to uncover broadening new ways to capture growth potential.

Although the calendar may have flipped to 2024, US growth stocks remain on the same upward trajectory that characterized the final months of last year. The major themes dominating financial headlines are also unchanged, with investors still rewarding companies benefiting from the remarkable emergence of game-changing artificial intelligence (AI) technologies and the introduction of groundbreaking obesity therapeutics (known as GLP-1 drugs).

The enduring nature of this market rally is not surprising given the positive backdrop. The economy continues to impress with its resilience; the US seems impervious to the pressures impacting much of the rest of the world. Importantly, the employment market remains healthy with jobs still plentiful. Inflation also continues to moderate, albeit at a slower pace than the market anticipated when this phase of the equity rally first began in late October.

All eyes remain fixed on the Federal Reserve, which is still on track to lower overnight rates as the year progresses, although at a more moderate pace of two or three cuts this year, rather than the wildly optimistic expectations of six or more that some had initially expected. At the same time, the fiscal picture remains supportive, as is common in most election years.

While traditional growth sectors have outperformed thus far in 2024, market participation has broadened further as expected, with energy, financial and industrial stocks joining technology stalwarts in delivering strong returns during the quarter. At the same time, the market is starting to become more discerning each day, even within some themes. The “Magnificent Seven” that dominated the market last year are no longer moving in lockstep. Instead, individual companies are now trading on their own merits, with some clear outperformers and notable laggards.

AI continues to draw enormous investor attention, and with good reason. Early adopters have started to get glimpses of real-world applications in text summarization, content creation, and customer analytics. To date, the initial AI winners have mostly hailed from the semiconductor, cloud, and software industries (i.e., companies enabling AI). However, we are likely in the early innings of a decades-long transformation. Ultimately, we believe the market’s focus will broaden to a wider cross-section of AI beneficiaries, given the potential of AI to help companies of all stripes become more efficient—and by extension, more profitable.

As the year progresses, US elections will take center stage, while geopolitical risks (including two active wars) will likely continue to dominate the headlines. Despite this, being a successful growth investor requires a long-term outlook, disciplined risk management, and the ability to see beyond the ever-present wall of worry. We believe our approach meets these criteria.