In our Q1 Outlook we said that the commodity sector would perform well under rising inflation expectations, that the interest rate sensitivity has increased, and that growth stocks could hurt from rising interest rates. We also questioned whether the bull market in green transformation stocks could continue. In this quarterly outlook, we focus on what the world and financial markets are short of and how that translates into equity markets.
The world is short of physical capacity
The biggest trend since the great financial crisis is the divergence in earnings growth between Nasdaq 100 and the global equity market, highlighting the grotesque relative success of the online economy over the physical economy. Nasdaq 100 earnings are up 828% per share since Q4 2003 while MSCI World earnings are up only 114%. This trend has sent out a powerful market signal to investors that the future is about digitalisation in all its forms, and as a result capital has flowed towards e-commerce, software, payments, gaming, etc.
Underpinning this trend has been a rapid decline in interest rates, lowering the cost of capital for fast-growing, equity-financed technology companies. Regulation is hopelessly behind in the digital revolution and this has provided the sector with an unprecedented benign regulatory regime. Energy costs have constantly declined, lowering the marginal costs of adding users, training neural networks and processing information. The online world has been able to expand on the foundation of the physical world that supports it, but now many of the tailwinds seem to be turning.