Author: Just Summit Editorial Team
Source: Morgan Stanley
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The market's earnings growth is questionable due to weak cash generation and high starting margins. While MSCI World forward EPS rose 23% year-to-date, free cash flow growth lagged by 12 percentage points. This suggests the strong earnings are concentrated in AI and energy sectors, and not broad-based.
The sustainability of AI-driven earnings is a key concern. Exceptional economics typically attract new capacity, potentially reversing current supply constraints. We need to watch if AI can truly reverse the trend of cheaper components per unit of output.
Quality compounders offer resilient growth and pricing power, trading at attractive free cash flow yields. These businesses are less sensitive to AI, commodity prices, and inflation cycles. Our portfolios hold select AI enablers, quality businesses benefiting from AI, and defensive compounders for diversified outcomes.
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