Equities in Focus

Oil and AI’s Double Whammy
 

The current war in the Middle East is understandably unsettling, but some context matters. As Display 1 shows, energy goods and services account for a much smaller share of US consumer spending today than in prior decades. (However, should high oil prices linger for too long, its effect on the economy and the equity markets would be a headwind. Time will tell.) And before the war, many firms’ stocks were upended on fears of how AI may affect their future fortunes and viability (Display 2). Combined, these forces have led to a significant contrast between index-level return figures versus the amount of movement some stocks have experienced (Display 3).   

Rudders for the Journey 
 

Key factors that have performed well this year are those we believe can augment the odds of investor success, beyond some classics (related content). Display 4 reveals that companies with balance-sheet strength, those allocating capital toward high-barrier-to-entry assets, such as plant and equipment (harder for AI to displace), while earning an attractive return on those investments as indicated by favorable returns on invested capital, have outperformed high beta stocks and companies that have unfavorable levels of debt to equity. Further, companies that successfully manage their businesses while incorporating AI to increase productivity are likely to attain positive earnings revisions.  

Our View 
 

In periods of rapid change, anchoring investment decisions to what has historically worked can become more of a liability than an asset. What defined “safe” or “quality” leadership in the past risks becoming backward-looking when the pace of change accelerates. Maintaining a discerning eye and actively embracing the traits we highlighted are vital elements for charting today’s course.   

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