Now leaving ThriventFunds.com

 

You're about to visit a site that is neither owned nor operated by Thrivent Asset Management.

In the interest of protecting your information, we recommend you review the privacy policies at your destination site.

Financial Professional Site Registration

Complete this form to get full access to the entire financial professional site.

By clicking “Register”, you agree to our privacy and security policies and that you are a financial professional.

Access will be granted immediately, but the registration process may take up to 5 business days to complete.

Thank you for registering

You can now enjoy all financial professional content.

If your download does not start automatically, click here.

An error occurred

Please check back later.

Steve Lowe, CFA
Chief Investment Strategist

The changing landscape of the equity markets

11/29/2022
By Steve Lowe, CFA, Chief Investment Strategist | 11/29/2022

The equity market, like the economy, is cyclical. It goes through long periods where certain macroeconomic or business trends lead to meaningful performance differentials for various market sectors and companies.  

After a long bull market, driven by low interest rates, technological innovation, high profit margins, and lush corporate profits, the economy and the equity market seem to be in a transitionary period driven by changes in the economic environment. Meaningful changes in the relative performance of various sectors of the equity market have developed over the past year, and they seem poised to persist.

After many years of disruptive change, driven by technology, globalization and extraordinary monetary policy (negative interest rates and enormous bond buying), 2022 has been a year that can be characterized as a reality check or a return to the old normal. 

After more than a decade of extraordinarily supportive financial conditions, global central bank policies have changed dramatically to a much more restrictive stance in order to combat the economic challenges presented by surging inflation. Sharply higher interest rates have been the material catalyst driving dynamic change in the stock market, not just in terms of eliciting a general bear market, but also in terms of changing market leadership and dispersion of returns.

A time of change

Highly accommodative monetary policies, disruptive technologies, and a global pandemic set the stage for some very new, if not strange, developments.  Interest rates not only fell to levels that had not been seen in hundreds of years, but, in many countries, fell to negative levels that investors had never experienced before. Valuations for many growth companies, regardless of profitability, ballooned to levels that were equally hard to comprehend.

Valuations for some small, struggling companies that caught the attention of social network investors (aka “meme” stocks”) went to absurd levels, while the multitude of crypto-currencies and non-fungible-tokens (NFTs) spiked to soaring values that seemed to be driven less by financial conventions than by trend-following and FOMO (fear of missing out). 

Interest rates and bond yields are now valued at a more normalized level given the realities of inflation. Valuation for the stocks of many mega-cap, high-growth companies have been slashed, leading to sharp price declines. Finally, the rose-colored metaverse goggles that many investors had been wearing have been removed, showing that prices for many assets related to the burgeoning crypto financial industry had been supported by augmented reality.

Changing perceptions

As interest rates and bond yields rose, investor expectations also changed, but to a lower, more risk-averse attitude.  This has led to key dynamic stock market trend changes which are likely to persist into the new year and beyond:

  • Corporate earnings expectations are now declining. The realities of inflation and a possible recession, with their combined impact on corporate profitability, are slowly being factored into earnings estimates. Higher wage and input costs are expected to pressure profit margins and earnings. Companies are now shifting from a growth mentality to a cost-management mentality. Uncertainty over earnings will be a discordant theme going into the new year. Diminishing earnings expectations will be a muting influence on overall equity market returns.
  • Stocks of companies that exhibit old normal factors related to value, lower volatility, return on equity, and higher earnings and dividend yields have vastly outperformed the broader market in 2022. With higher interest rates and economic uncertainty (risk of recession), this trend will likely continue until rates sustainably roll over.
  • The long bull market concluded with an increasingly concentrated group of stocks that were driving broader market returns. The extreme narrowness of the market proved to be a problem when some very large companies, such as Netflix, Meta (aka Facebook) and even Amazon, suffered price declines of 40 to 70%. Recently, market breadth has improved, and a much more diverse group of sectors and companies have begun to outperform the broader market. 
  • The Technology sector has decidedly relinquished the equity market leadership mantle it has enjoyed for more than a decade. After years of lagging relative performance, stock market value sectors, such as Energy, Consumer Staples, and Industrials, have performed dramatically better than the overall market over the past year. More recently, even as bond yields have declined (which typically benefits the high growth technology sector), these value sectors continued to significantly outperform the growth-oriented sector of the market. They have also been joined by other value sectors such as Financials and Utilities. In short, the shift in investor attitude toward more reasonably valued diversified industrial sectors, rather than a singular focus on technology and growth, seems to be a longer-term persistent theme.
  • Small and mid-cap stocks have been outperforming large cap stocks over the course of 2022. However, this improved performance may be due more to industry composition and a domestic focus rather than size. Still, after years of lagging large capitalization stocks, this trend of small and mid-cap companies generating more attractive relative returns seems poised to persist, but only for those companies with proven and sustainable business plans that generate a compelling return on capital and maintain solid balance sheets.  
  • International stocks, and especially emerging market stocks, have offered exceedingly disappointing returns for a number of years. A key reason for this has been the dramatic appreciation of the U.S. dollar relative to other global currencies, as well as fundamental economic and market problems abroad. However, both the value of the dollar (very high), and the relative value of international stocks (very low), have reached extreme levels. Recently, the U.S. dollar declined sharply, while international stocks fell to valuation levels that are difficult to ignore. Investor attitudes toward the international sector appear to be changing, with relative returns for this more volatile sector of the market improving throughout the year.

Equity markets tend to go through long cycles as economic, business and investor behaviors change. These cycles seem to persist for about a decade and tend to conclude in some form of excessive speculation. Subsequent new cycles are usually characterized as a return to traditional business and financial virtues. They often involve a renewed focus on sectors or companies that have solid long-term fundamentals, visible earnings, clear policies of returning capital to shareholders, and rational valuations.

Although transitions from one cycle to another can be unnerving in the short run for investors, they are good for the long-term health of the markets and the economy. They are also good for investors who exhibit the time-honored virtues of patience, discipline, broad diversification – and who remain committed to a plan, even during turbulent times.


All information and representations herein are as of 11/29/2022, unless otherwise noted.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product.  Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Any indexes shown are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.

This article refers to specific securities which Thrivent Mutual Funds may own. A complete listing of the holdings for each of the Thrivent Mutual Funds is available on thriventfunds.com.

Past performance is not necessarily indicative of future results.


Related insights

01/31/2023

Revisiting evolving bond market opportunities

Revisiting evolving bond market opportunities

Revisiting evolving bond market opportunities

Since the fall of 2022 when interest rates and bond yields hit their peak, credit spreads and interest rates have both declined, driving stellar short-term returns in the bond market. After such a significant stretch of strong performance in a relatively short period of time, how much has the opportunity set in fixed income changed, and what are the expectations for the various income-oriented sectors of the market?

Since the fall of 2022 when interest rates and bond yields hit their peak, credit spreads and interest rates have both declined, driving stellar short-term returns in the bond market. After such a significant stretch of strong performance in a relatively short period of time, how much has the opportunity set in fixed income changed, and what are the expectations for the various income-oriented sectors of the market?

01/31/2023

Market Update [VIDEO]

01/24/2023

Fixed-income markets outlook: Q1 2023 Capital Markets Perspective [VIDEO]

Fixed-income markets outlook: Q1 2023 Capital Markets Perspective [VIDEO]

Fixed-income markets outlook: Q1 2023 Capital Markets Perspective [VIDEO]

What does Thrivent Asset Management see in the future of fixed-income markets and the Federal Reserve’s approach to combatting inflation? Our leaders discuss their outlook, as well as the asset classes they’re watching.

What does Thrivent Asset Management see in the future of fixed-income markets and the Federal Reserve’s approach to combatting inflation? Our leaders discuss their outlook, as well as the asset classes they’re watching.

01/24/2023