A basket with room for more eggs

In May, it was fairly quiet on the Mideast front, so oil prices fell from $114 to $92 a barrel. True to form, most markets saw a clear appreciation, with the MSCI World Index rising by almost 5%, while the Norwegian benchmark index lost some 0.9%. It is still up by 18.5% this year, or more than 24% if you start counting half a year ago.

The bull market in stocks was not driven by lower interest rates. US market rates were actually slightly higher. Growth stocks, logically the most sensitive to changes in interest rates, were nevertheless this month’s winners. The Nasdaq Composite rose by 8.4%, bringing this year’s appreciation up to more than 16%.

Do note that this is not primarily a story of increasing optimism and multiples, like the Internet bubble a quarter century ago. In fact, estimated earnings for the next 12 months are up by 18% for the Nasdaq Composite and by 17% for the S&P 500. In a sense, the AI story is turning into a macro story. With the enormous AI-led capex spending, there is a large ecosystem of companies doing very well, thank you, even if the wider economy is slowing down.

Much has been made of the concentration in the US stock market. My point now is that it reflects strong and similarly concentrated earnings – with no attempt on my side to guess how long this can be sustained.

The Norwegian stock market is no less concentrated. The seven largest companies represent more than 50% of the total market cap (and I’m not including a recent spinoff). The returns are even more concentrated, according to my calculations: the same seven companies have contributed more than 70% of those past six months’ index returns.

Here, too, the gains are sustained by higher earnings. Estimated earnings for the next 12 months are up by more than 22% this year. In terms of drivers, however, it is a different story. Few traces of AI, lots of geopolitical impact. Four of the five largest companies are direct beneficiaries of wars in Ukraine and the Middle East, with higher prices on oil and commodities like aluminium.

I don’t know how long this can be sustained, either. Of course, I sincerely hope that the AI boom will outlast the wars in Ukraine and the Middle East, with ripples reaching a wider set of companies and industries. If we were to believe President Trump (not my advice), a Middle East peace accord is just around the corner (and has been for a while).

Without a well polished crystal ball, we have no option but to rely on a longer-term strategy – and stick to it. Here’s a perhaps not so surprising suggestion: Put together a balanced, well-diversified portfolio that is less dependent on current trends continuing indefinitely. They won’t.

Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on, market developments, the portfolio manager’s skill, the fund’s risk profile, as well as fees for subscription, management and redemption. Returns may become negative as a result of negative price developments. This is marketing communication.