Brighter outlook for US earnings

History tells us that, following earnings downturns like the one in 2022, profits tend to rebound. Typically, companies cut costs when they see their earnings fall. Hence, when economic conditions improve, they see higher profits.

However, it may not all be smooth sailing as there are signs people are still feeling the pinch when it comes to their money. For example, the University of Michigan Consumer Survey shows consumer sentiment remains fragile. In November, 46% of the survey’s respondents said they were worse off financially than a year ago, versus 28% saying they were better off, with the principal factor being higher prices.

The investment side of the economy looks in better shape for some, however. After a year of recovery in 2023, there are high expectations for some sectors this year.

It’s really important to caveat ahead of the formal Budget announcement that there is plenty of speculation and nothing is set in stone. NatWest Premier does not provide tax advice and the below should not be taken as such. We recommend you contact an independent tax advisor to discuss your personal tax situation.

UK equities in a post-pandemic, higher-rate environment, are falling behind their global peers. This may seem surprising given how much of the largest companies in the FTSE 100 and MSCI UK depend on international activity and overseas earnings. This could be down to the breakdown of sector dominance in the region.

As you can see in the table below, there are some significant differences in the weighting of sectors in the MSCI UK compared to its US counterpart.

Technology, for example, performed well in the US last year, but accounted for less than 1% of the MSCI UK. On the other hand, financials – including banks that had a tough 2023 and face low expectations this year – accounted for more than 18% of the MSCI UK.

The ongoing absence of higher growth sectors, in particular technology, drives the disparity in performance. And as far as the make-up of the market is concerned, that position looks unlikely to change.

A re-rating of the market is reliant on a move back to more value-style investing. The forward-looking investor will be more attracted to the US market compared to the UK. But opportunities will arise in the UK when confidence around the Bank of England’s policies and the overall economic direction improve.

For now, investors will be focusing on locking-in above average dividend yields at cheap buy-in prices.