Are the “Magnificent Seven” trees causing us to miss the forest of global equities?

The main stock-market indices are soaring to record highs despite the uncertain economic climate. Yet beyond the risk of euphoria, the fundamentals remain solid – and some regions could deliver favourable surprises.

Driven by sturdy earnings

The main global equity indices are flirting with record highs. But there’s a striking contradiction – how is it that stock markets are continuing to climb when economies are being weighed down by geopolitical tensions, high interest rates, trade wars, and actual wars?

The answer is straightforward: earnings growth. The US tech giants have seen their earnings per share (EPS) surge by 500% in five years. And this phenomenon is not exclusive to the Magnificent Seven. The EPS of the rest of the US large-cap market, as well as European and global ones, are up between 80% and 110%. We’re clearly in the midst of a positive earnings dynamic.

Relative euphoria

Yet behind the surface of apparent complacency in global equities lies a more nuanced reality. While the US tech giants’ extraordinary run is undisputable, other US companies – besides the Magnificent Seven – have experienced robust, but not spectacular, earnings growth. More startlingly, European equities and global non-US indices have posted EPS growth above that of the S&P 500 if you exclude the tech giants. However, despite these robust fundamentals, their Price/Earnings ratios are considerably lower – by some 25%. This points to a growing mismatch between valuations and fundamentals, and suggests investors would be wise to reconsider investment opportunities outside the US. This mismatch is more than just an outlier. It could very well be a strategic opportunity for investors looking for entrenched earnings growth at a reasonable price, especially since we now have more clarity on the fiscal outlook in Europe and Asia, while the US could be facing impending headwinds.

Potential for good surprises

Investors are expecting another buoyant earnings season in the US, but less so elsewhere. However there may be some good news in store. The consensus five years ago was that US companies would dominate in terms of earnings growth. But the opposite has happened – excluding Big Tech.¹

Today, several indicators suggest that the landscape could be shifting. In Germany, public investment is gaining pace, especially in infrastructure. In Asia, there are growing signs of a recovery – visitor numbers to Macau casinos are up 20% and Chinese real-estate stocks are bouncing back. It seems governments want to kick-start their economies.

The US, on the other hand, could be in for a slump. We’re already seeing the effects of Trump’s protectionist measures, but the benefits of the fiscal easing won’t materialise until at least 2026. And with the Fed keeping a particularly close eye on the tight job market, any monetary policy support will be limited.

Two asset allocation opportunities

We therefore see two possible performance drivers for investors. US tech giants have become more attractive now that the hype about artificial intelligence has dissipated. These companies have robust fundamentals (profit margins, cash flows, and guidance), providing upside potential as well as greater resilience in times of high interest rates.

We also suggest a significant allocation to equities from the rest of the world. We believe that non-US markets are undervalued, under-owned, and underestimated in terms of potential gains. Near-term macroeconomic trends are more favourable in these markets – meaning we could be in for some positive surprises.

Neither optimistic nor pessimistic, but realistic

Investors are often torn between caution and enthusiasm. But clear-eyed thinking will be the best guide as we navigate the lofty expectations for US stocks and the signs of a shift in global markets. In today’s increasingly fragmented world, opportunities may lie right where we least expect them.