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This year is another one where equity market performance has been relatively narrow. The world index is up over 16%, in euro terms, whereas the equal-weighted world index (where all companies in the index have an equal weight) is up only 5%. We have said many times in the past that much of this narrowness is merely reflecting what is going on in relative earnings.
In the chart below, we map the price (blue line) and earnings (grey line) performance of the ‘Magnificent 7’ relative to the S&P 500 equal-weighted index. The prices of the ‘Magnificent 7’ have been doing very well because their earnings have been growing much faster than the broad market. Over the last four months, this move has become somewhat extended. The relative price line is now well above the relative earnings line. Consequently, we feel that there should be some broadening out in equity market performance, and this could be a challenge for the overall index level. However, we must bear in mind that we will have the second quarter earnings over the next couple of weeks and some of this gap could be closed by more earnings upgrades for the ‘Magnificent 7’.
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