As the fourth-quarter earnings season in the US stock market nears its conclusion, a fundamental shift is underway in the long-standing dominance of profits by a handful of technology giants. Since mid-December, the Russell 1000 Value Index has significantly outperformed its growth counterpart. Recent financial reports reveal that the number of sectors within the S&P 500 showing positive growth increased from six in the third quarter to eight out of eleven total sectors. Nearly half of the companies reported double-digit growth rates, with the median growth rate approaching 10%, marking a four-year high.
Bankim Chadha of Deutsche Bank noted that growth is beginning to broaden beyond just the mega-cap tech stocks. The overall earnings growth rate for the S&P 500 has slightly risen to 14.5%, a four-year peak. Bloomberg columnist John Authers analyzed that the market is undergoing a clear style rotation. This shift is not stemming from a decline in the tech giants but is driven by cyclical factors improving profitability in other market segments, suggesting the highly concentrated profit era for US stocks may have ended.
Although the narrative around artificial intelligence (AI) continues to dominate, a cooling labor market and cyclical tailwinds are reshaping investor expectations. The retreat in US Treasury yields and changing inflation data provide a macroeconomic backdrop for this capital rotation from the "new economy" to the "old economy," a process bearing similarities to the style shift observed between 2000 and 2003.
**Value Resurgence and Cyclical Recovery** The core issue of market concentration lies in the imbalance of earnings growth. Since the end of 2022, the ten largest companies in the S&P 500 have contributed approximately two-thirds of the index's earnings per share (EPS) growth, a stark contrast to the mere one-quarter contribution seen during the dot-com bubble era. However, research models from ClearBridge's Jeffrey Schulze and Josh Jamner indicate the US economy is currently in a period of "robust, broad-based expansion," which typically favors widespread corporate profits. This trend is confirmed by the earnings reports from S&P 500 constituents disclosed so far.
Andrew Lapthorne of Société Générale suggests a certain irony: the AI wave might be most disruptive to previously high-flying, asset-light industries, as they are now forced into aggressive capital expenditure to avoid falling behind. Conversely, last week witnessed a significant rotation into sectors perceived as "AI-immune," including utilities, food, mining, construction, and telecommunications. This capital transfer from "new" to "old" reflects a market reassessment of the valuations of capital-intensive and traditional industries.
**Currency Factors and the "NVIDIA Effect"** A weaker US dollar has also significantly impacted corporate earnings. John Butters of FactSet pointed out that S&P 500 exporters, which derive a major portion of their revenue from outside the US, have posted both earnings and revenue growth higher than companies focused predominantly on the domestic market. However, Butters also emphasized that this advantage of "international exposure" is still largely attributable to NVIDIA. As the largest contributor to earnings and revenue among S&P 500 companies with significant international business, excluding NVIDIA would cause the blended earnings growth rate to drop from 17.7% to 12.0%, and the revenue growth rate to slow from 11.9% to 9.9%.
Thomas Mathews of Capital Economics warned that the current market rally remains heavily reliant on the business models of a few key companies. In this context, specific developments at any single company or an "expectations miss" in the AI competitive landscape could potentially drag down the entire market. Nevertheless, the divergence in performance among mega-cap stocks in recent months has not prevented the broader market from maintaining high levels, indicating that the cyclically-driven, broad-based improvement in earnings is providing underlying support.
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