Be mindful of the market cycle shuffle 

by | Dec 4, 2023

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By Alison Savas, investment director of Antipodes Partners 

The global equity index has risen 5% this year but performance at the headline level masks the concentration in markets. On an equal weighted basis, the index is down almost 6% over the same period (this is where each stock is weighted equally as opposed to weighted by market cap). The divergence between the two shows that index performance has been driven by a handful of large stocks. 

In a similar vein, the top 10 stocks in the S&P now account for one-quarter of the index – another example of crowding into a handful of perceived winners. 


Such narrow performance does not support a soft-landing narrative. What we’re really seeing is a supportive liquidity environment propping up a few stocks. 

Fiscal activism vs the Fed 

Over the last six months, the US government addressed their widening budget deficit by issuing short-dated Treasury Bills rather than long-dated Treasury Bonds which has supported liquidity in markets. 


To labour the point, liquidity wasn’t sucked out of other assets to fund the T-Bill issuance – cash simply moved from an account sitting with the Fed into Bills – and by issuing short-dated debt the US Treasury was able to avoid upward pressure on long-term (10-year) government bond yields. 

This has supported equities, in particular mega-cap tech given excitement around AI and relatively resilient earnings due to cost control. The Magnificent 7 are now priced at more than 30x earnings, though within the group multiple dispersion is high – Meta is priced at 17x times forward earnings versus Tesla’s 55x. 

But this backdrop is changing. The US Treasury has historically maintained a mix of short-dated and long-dated funding. Short-dated debt is now at the upper-limit of the Treasury’s historical mix.  


The Treasury ultimately retains flexibility over its debt mix, but we expect that over time it will revert to the historical average, increasingly funding the very large deficit via issuing long-dated bonds. But before this terming out of the debt has even started, the yield on the US 10-year government bond has risen sharply, edging close to 5%, the highest level seen since early 2007.  

The two largest buyers are out of the market; the Fed, which is adding to the supply of Treasuries via QT, and banks. Also, unattractive yields and high currency hedging costs could act as a deterrent to foreign investors. That leaves the US household to step in via higher savings rates or by selling other assets. 

So, what does this mean for stocks? 


Bond prices fall with higher yields, and so too can equities. Higher yields equal higher discount rates which compress PE multiples. High multiple stocks will be vulnerable in this environment. 

These long-dated bonds will be bought but the question is at what price. Either yields will need to increase to attract household demand to soak up the supply that’s coming or the Fed will need to cut rates and reverse QT to take pressure off the long end of the curve. Hence, a dovish pathway for inflation from here is critical to the Fed’s ability to stick the soft landing. 

While the market remains fixated on the same seven stocks that have been supported by the recent liquidity-led rally, anchoring to previous winners could be a mistake. 


These companies will be vulnerable to a de-rating in a higher yield environment if forward earnings do not meet expectations. Consumer facing businesses – e.g. Tesla, Apple, Meta, Alphabet – may find it difficult to maintain or accelerate growth rates should economic activity continue slowing. Some are maturing which means their growth profile will become more cyclical. And as we’ve seen in this results season, the market is punishing stocks that disappoint expectations. 

The Market Reshuffle 

Every market cycle sees a reshuffling of previous winners due to new investment cycles and disruptive technologies. 


The largest company in the world in 1980 was IBM, who’s biggest suppliers, Microsoft and Intel, would ultimately come to surpass it as software and integrated circuits became the source of value, not hardware.  

Enter the 1990s, and only IBM and Exxon remained in the Top 10 from the previous decade, surrounded by new winners as Japan’s dominance rose. A strong economy, low rates, easy credit and a property boom were a heady cocktail until policy tightened. 

Fast forward to the next decade, and again only two of the Top 10, Exxon and Nippon T&T, remained into the 2000s, defined by the tech bubble. China’s stimulus-led growth dominated the Top 10 in 2010, with only Exxon Mobil, Microsoft and Wal-Mart carried over. 

Finally, today, the AI revolution, where only Microsoft and Apple remain from the 2000s, accompanied by a host of new entrants. 

This history lesson shows that rather than wedding to yesterday’s winners, the bulk of which will get knocked off their pedestal, investors need to focus on finding tomorrow’s winners. 

AI is a long-term trend in the early phase of adoption and monetisation where we will see as many losers as winners. Today the key potential for AI lies in the ability to drive productivity and revolutionise the way businesses serve customers.  

Other trends that will dominate the next decade (and beyond) are energy transition and supply chain onshoring. Given we are at the foothills of a policy-led investment super cycle, many of the beneficiaries are not yet efficiently priced. 

While the range of outcomes remains wide, concentration around a handful of perceived winners means opportunities exist for those prepared to look wider than consensus. 

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