Equity investing can still make sense during market highs

When the stock market climbs to new highs and valuations of numerous companies get frothy, investors can get nervous and question whether there is a bubble about to burst. In fact, the recently released 2024 Global Survey of Financial Advisors shows the sustainability of the market rally is at the top of investor concerns – as 72% of advisors worldwide and 84% in North America say clients want to know if they are protected from a downturn.¹

Here are three reasons why investors should consider staying stocked up and not park their cash in money market funds or CDs if they want to achieve certain long-term financial goals, or even outpace inflation.

1. Record highs can be followed by more highs.

Although the market may be setting record highs, the history of the S&P 500^®, considered to be the main benchmark of how the US stock market is performing, shows that record days have often been followed by more record days – and missing out on subsequent highs can be costly.

Source: Natixis Solutions, Bloomberg (12/31/83–6/27/24). 
All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.

2. Economic factors look favorable for stocks.

There could still be upside to economic growth in the US and across the globe. Here are a few perspectives from our equity investment managers to consider.

Slowing, but not slow US growth: Although there is slowing US economic data being reported, the labor market is a key metric, and it is still in good shape. “The consumer has a job. Real wages have been rising thanks to falling inflation. And hours worked remain steady. This means the consumer remains resilient and should continue to spend,” says Jack Janasiewicz, Portfolio Manager, Lead Portfolio Strategist, Natixis Investment Managers Solutions.

Signs of growth globally: Global growth should be a little stronger as we close out 2024, believes Chris Wallis, CEO, Portfolio Manager, Vaughan Nelson Investment Managers. “We had a six-quarter global industrial recession end this past summer. So we’re going to see for the first time in over a year strength out of European industrials, pick-up in activity out of Asia, and the US should follow. At the same time, we’re seeing an increase in liquidity provisioning by the major central banks in Europe, Japan, China, and the US Fed,” says Wallis.

Stock prices have room to grow: Valuations are not quite as stretched as investors may think, according to Jack Janasiewicz. If we look at forward price-to-earnings (P/E)* outside of the Mega-Cap 8 names (Alphabet, Amazon, Meta, Apple, Microsoft, Netflix, NVIDIA and Tesla), valuations appear to be ok, with the S&P 500^® ex-Mega Cap 8 forward P/E at 19.0x compared to the Mega-Cap 8 forward P/E at 28.7x.² “More times than not, focusing on elevated valuations forces you out of the market far too soon, potentially leaving plenty of returns still on the table,” says Janasiewicz.

Structural growth drivers underway: AI is the biggest structural shift we have seen since the internet revolution, says Aziz Hamzaogullari, CFA^®, Founder, CIO, and Portfolio Manager of Growth Equity Strategies at Loomis, Sayles & Company. The Magnificent 7, collectively, account for roughly 40% of the research and development spend of the top 1,000 companies in the United States. “The potential gain to productivity for all companies is tremendous, while the direct beneficiaries will be a handful of companies. This is no different than how it was for the internet revolution where only a few businesses were able to provide the products and services,” says Hamzaogullari.

There are also growth opportunities connected to AI further down the supply chain and value chain, says Jens Peers, CEO, Portfolio Manager, Mirova-US. “A simple way to compare this is to the gold rush era, where you could make money finding gold, but also probably a safer bet was investing in picks and shovels. So in the AI space, we see a lot of opportunities. For example, in building data centers, including cooling installations and other sources of renewable energy,” says Peers.

Beyond AI, there are several global growth themes at play that Peers believes will reshape our economy over the next 10 years. “In healthcare, we are seeing more and more positive evolutions with treatments in the battle against cancer, as well as obesity-related issues. Biodiversity is another area we expect to see significant opportunity,” says Peers.

3. History is on the stock market’s side.

Over the long term, the S&P 500^® has historically delivered significantly more positive years of performance than negative ones. This is an important reminder of the potential upside associated with equity investing.

Source: Natixis Solutions, Bloomberg, June 2024.
All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.

For long-term investors, equity investing could still make sense, even when markets are at all-time highs.

One way to consider investing in equity markets is through actively managed equity funds. While passively managed equity funds seek to track the performance of their chosen benchmark index, they seek to track the performance in both up and down markets. Actively managed funds, on the other hand, rely on portfolio manager experience and investment insights to try and outperform market benchmarks, such as the S&P 500^®, in all environments – from market highs to times of market downturns.

Need a better game plan for cash?

The Natixis Portfolio Playbook helps you discuss the potential risks clients face when they opt for cash investments over the markets and offers solutions for getting them back in the game.