3D Report: Q1 2024 Recap—Effectively valuing the Mag Six

Ryan Caldwell and Lara Rhame review the 3D Report for Q1 2024

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March 21, 2024 | 56 minute read

While the Magnificent Six continue to lead the S&P 500 to new heights, markets are still learning how to effectively value these tech growth superstars. Meanwhile investors begin to face the reality of their rate cut pipedreams amid strong economic momentum and an increasingly volatile world.  

In this episode of 3D Report, Chief Investment Officer Ryan Caldwell and Chief U.S. Economist Lara Rhame examine where markets are at the end of Q1 and what investors could see in Q2—including how the current environment opens up potential opportunities that may not have been attractive for the past 15­–20 years.

Transcript excerpt:

Ryan Caldwell:
So I thought maybe what we would do, I wrote our quarterly 3D report and I tried to maybe take a little bit of a look back and look at what were the misses. Because again, I think last year as I sort of talked about in the piece, there was a whole lot to look at, but there turned out to be from a market returns perspective, really just one thing that ended up mattering and  so far almost to start the year, it feels a little bit similar to where we maybe…not tailed off, because we kind of had this big pivot rally at the end of the fourth quarter that now seems to be reversing, which we’ll get into…but again, I think what sort of the underlying drivers were, at least for equity markets last year so far, looked like they’ve held together.

And in some instances you might argue they’re being exacerbated relative to trend. But I thought in your piece, and again Lara’s going to publish hers and I’ve been lucky enough to get the preview because we figured it might make some sense. And what I wanted to do is sort of match together what I was looking to highlight in the 3D report with sort of your economic update. Because quite honestly, and again, we don’t collaborate on these before we write them. I was kind of stunned to go, oh, okay, this fits actually pretty well with how we thought at least the other, I’m going to parse the equity market for a little bit on this podcast, the kind of other 493 and credit and sort of what that looks like, the more economically maybe reflective parts of the economy versus the big seven in what’s happening. And then obviously, Lara, sort of this cycle, right? Because I think what I’ve picked up from you, rightly so, there’s been a couple of things I think that you’ve got really right, that I think people need to start baking into forward expectations. And I want to touch on those because we’re going to come back to multiples and what we’re paying for things and what we’re growing and ultimately allocating capital and sort of how we see that. So, if that works, I thought maybe I’d try to do a little mashup and kind of use you to do it.

Lara Rhame:
No, sounds good. Sounds good. Put me in coach.

Ryan Caldwell:
Alright. So maybe let’s start here, Lara, maybe I think, and again, I think you kind of put a dagger through this a little bit on our last podcast, but I wanted to maybe kind of circle back on it because I think it’s pretty important, which just kind of the growth call. And I wanted to start with growth because this has been, is it a recession? Is it not a recession? It seems to me particularly the world has kind of pivoted from a year ago, believing there was almost a hundred percent certainty of recession to now. I think the softer landing or not a disaster, maybe I’ll start there, is sort of manifested if you will. And the economy stayed relatively strong. Headline inflation is cracked, although we’re going to spend some time on inflation. So, maybe table that or put a pin in that one for a minute. But as you pointed out, and you pointed out at the end of the year and emphatically you’ve sort of been behind the scenes saying this is the growth is pretty good. And I think we maybe I want to spend a minute on the big compositions, business spending inventories, consumer, and maybe just kind of touch on that for people and sort of where you’re at in February 29th of ‘24.

Lara Rhame:
And listen, guilty as charged. I was one of the people who a year ago was very worried about the possibility of a recession. Yeah, I know. Well, and I think we shouldn’t beat ourselves up over it like 2022. We had 425 basis points of rate hikes within nine months. Just really not comparable to anything except for the 1980s. And I would argue even more aggressive because back then they were starting from 16% fed funds rate and we were starting from zero. So, in terms of magnitude, I think it was full stop the most aggressive. And then in March we had the regional bank failures and a lot of us were like, oh boy, here it is, here we go. And there are times when it is good to be wrong. Nobody ever wants a recession or roots for it. So, in that sense, I could not be happier that we avoided one, recession’s never a good outcome.

And what we really saw last year was truly, I think you look quarter by quarter, it can only be described as an economy firing on all cylinders. And I think it’s important to appreciate as we go sector by sector, I’ll knock off two of the smaller ones first, that business investment is going to be also sensitive to interest rates. But I don’t think we saw that emerge last year for two reasons. Obviously massive incentives for businesses to invest. I think coming off of truly 15 years of underinvestment, I could not be happier that we are finally seeing business investment. Some people would point out that it kind of slowed towards the end of the year, but the fact that we’ve had now nine quarters of positive business investment in a row to me is a strong positive. It’s only 15% of the economy, only 15% of GDP, I call it a swing factor.

But boy, it is swinging in the right direction. And I think it gives us all of the things that we love investment for. It’s the productivity growth, eventually it’s more jobs. It’s all of those things that really I think are our good and our positive. And then we look at government spending, which again, quarter by quarter last year added five to eight tenths every quarter to GDP growth. And another way to say that is if we averaged over 3% GDP growth last year, that would’ve been 2.2, 2.5 if we didn’t have the government just pouring as much money as they still are into the economy like it or lump it, it’s just stating the facts. This is really added to GDP growth and if you look at hiring, it’s added to job growth too. So, these are the powerful tailwinds that have given us just blockbuster GDP growth of 3.1% last year. Very strong and are still I think powerful positives.

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Lara Rhame

Chief U.S. Economist + Managing Director

Ryan Caldwell

Managing Director, FS Investments

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