Investors scrambling for safety rush to biggest US companies

NEW YORK (BLOOMBERG) - Investors are scrambling for safety as risks mount, from the war in Ukraine to rising interest rates and a global recession. They have found it in the United States stock market - particularly the biggest American companies.

The S&P 500 Index is up more than 8 per cent over the past two weeks, recouping all of its losses since the Russian invasion on Feb 24. Meanwhile, the tech-heavy Nasdaq 100 has gained almost 11 per cent over the same span. With earnings looking strong and corporate outlooks improving, there are reasons to think these gains can hold despite the myriad risks facing global equities.

"It bothers people because they feel like the market is heartless," Ms Nancy Tengler, chief executive and chief investment officer at Laffer Tengler Investments, said in a phone interview. "And that's correct."

The fighting set off a spike in commodity prices, stoking inflation that already was at a four-decade high. Meanwhile, sanctions on Moscow threaten to weigh on global economic growth.

Recession risks in the US are also piling up, with parts of the Treasury yield curve inverting as the Federal Reserve embarks on a new tightening cycle.

Perhaps most puzzling is the fact that the world's biggest stock markets have not collapsed. The Stoxx Europe 600 Index is basically flat since Russia invaded Ukraine. The MSCI AC Asia Pacific Index is down a little more than 3 per cent in that span and the Nasdaq Golden Dragon China Index has lost around 7.5 per cent, largely because of growth fears and the risk of Chinese firms being kicked off US exchanges.

For now, American stocks appear to be the best option for global investors, particularly compared with bonds. The return on global government debt weighted by world gross domestic product is on course for its worst year since 1949, according to Bank of America.

"The view is we should just rotate to sectors which are more favourable to the situation, because there's really not much of an alternative to equities," said Ms Ilya Feygin, managing director and senior strategist at WallachBeth Capital.

Large-cap stocks in the US offer more safety and value than small- and mid-cap shares since they tend to generate reliable income for investors, especially companies that can maintain dividend payouts.

In addition, the US equity market's swoon to start the year may have largely priced in a spike in oil prices and softening of economic growth, meaning they are not as expensive anymore, according to Ms Tengler.

"US large-cap stocks are havens because they're reliable growers and don't have a ton of debt," Ms Tengler said. "This is an opportunity to get higher-quality companies on sale."

Another leg of support for US stocks has been improving expectations for first quarter S&P 500 earnings-per-share growth, which have increased for three straight weeks, according to Bloomberg Intelligence.

"Stocks appear to have largely priced in near-term geopolitical and interest-rate risks," Bloomberg Intelligence chief equity strategist Gina Martin Adams wrote in a note. "Earnings forecasts are climbing again, as analysts get more comfortable with supply-chain risks and revenue estimates keep improving."

Investors also are finding comfort in American corporations thanks to the huge piles of cash on their balance sheets amassed during the coronavirus pandemic. As a result, US companies are stepping up share buybacks to records. S&P 500 firms bought back US$882 billion (S$1.2 trillion) in stock last year, up 9.3 per cent from the prior record set in 2018, according to S&P Dow Jones Indices.

In addition, some of the biggest technology names, like Apple, Google parent Alphabet and Microsoft, remain down the year, providing opportunities to buy shares that had been at all-time highs not too long ago.

"Big Tech has shown resilience, especially the Faang names," Mr Eric Beiley, executive managing director of wealth management at Steward Partners Global Advisory, said in an interview. "Investors saw some of those stocks down at least 20 per cent as a buying opportunity. Cyber stocks have also been a bright spot, while semis are attractive since they're the backbone of the digital world."