Stock markets have been making new all-time highs in the US, Europe and Japan and investors are asking whether they are witnessing a new global bull market for stocks which began in November 2023.

Momentum is a powerful factor in stock markets. Prices tend to trend in the same direction which mean buying winners and selling losers can be a profitable strategy.

It is not only about price but also earnings momentum. Persistent upward revisions to consensus earnings estimates are a key driver of stock performance.

Later in the article we screen for companies with strong price and earnings momentum to find potential winners from across the UK, European and US markets.

Before that, it is worth trying to understand if the current momentum in markets is as strong as it looks. It may seem like an odd question to pose but strength at the index level is more sustainable if lots of individual stocks are participating.

In the US the rise of the Magnificent Seven is having a distorting effect on indices, causing narrow market leadership which could portend future weakness.

That does not necessarily mean the rally can’t eventually broaden out, although it is telling the small cap Russell 2000 index sits around 15% below its all-time high and has yet to join the party.

Technical analysts have created statistical measures of market breadth to help understand the strength and sustainability of a trend.

 

 

HOW STRONG IS THE US MARKET?

The McClellan Volume Oscillator is a market breadth indicator that is based on the smoothed difference between the volume of advancing and declining shares.

Since the start of 2024 this indicator has flashed more selling than buying volumes which implies the market is rising with less conviction than earlier in the year.

The indicator plots the daily difference between the number of stocks making new 52-week highs and those making new lows. A high reading indicates more stocks are making highs.

The reading has been falling from a high in recent weeks suggesting momentum is falling.

The Dow Theory was created by Charles Dow more than 120 years ago. The logic behind the indicator is, if US consumers are doing well and spending freely, transportation stocks should also do well because they are tasked with moving these goods around.

The idea is a new high in the Dow industrials index should ideally be ‘confirmed’ by a high in the Dow transportation index. Non-confirmation can be a sign of trouble ahead.

The Dow transportation index is trading around 11% below its all-time high and has not yet confirmed the new high in the Industrials index.

Transportation stocks are seen as a leading economic indicator. Two major components of the index, Fedex (FDX:NYSE) and UPS (UPS:NYSE) have both given tepid outlooks in their earnings reports suggesting uncertainty is creeping into the resilient economy narrative.

There is no time window on a confirmation signal and the Dow transports may yet make a new all-time high, so it is worth monitoring over coming weeks.

All in all, the evidence from market breadth data throws up some red flags which are worth considering when assessing the sustainability of current momentum.

 

 

US EARNINGS ARE TURNING UP/RATES DOWN

As mentioned earlier, earnings momentum is also an important part of overall picture, so how does it look? There are signs US earnings are starting to see increasing momentum after troughing in the spring of 2023.

US consensus earnings forecasts call for double-digit growth in 2024 according to FactSet data which should be supportive for share prices

Interest rates are expected to fall as inflation continues to drop back towards target. One of the Fed’s preferred inflation measures, the core PCE (personal consumption index) is now below 3% on an annual basis.

This should give stocks an added boost and support higher PE (price to earnings) multiples. We provide a caveat to this later in the article.

While it is well understood market and economic cycles do not move in lockstep (stock markets anticipate trends in the economy), it may be worth considering where we are in the current cycle given the confusion created by the pandemic.

Put simply, most economists believe the current economic cycle is long-in-the-tooth. If a new up-cycle has started it would imply the central banks have engineered a soft landing.

It would also imply the long and variable lags of monetary tightening have fed through the system already which seems improbable given corporates and consumers are still benefiting from low-cost refinancing and government handouts during Covid.

Lastly, it is worth asking what the chances are a new bull market can begin on sky-high valuations. The Shiller PE (price to earnings) ratio is sitting at its third highest ever reading at 35 times. The sequencing seems to be all out of sync. The Shiller PE is a cyclically adjusted PE created by the economist Robert Shiller.

Historically bull markets are born when stock valuations have been bashed down by a recession.

In conclusion, the fact stock markets are making new highs is a positive but there are specific caveats we have identified which suggest cautious optimism is more appropriate than full blown excitement.

 

SCREENING FOR MOMENTUM

Using software from Stockopedia we have screened UK, US, and European markets for stocks showing strong momentum and identified our best picks from the lists generated.

The screen combines price strength and earnings growth. Studies have shown stocks with the strongest price gains over six months tend to continue to outperform. Likewise, those with the best earnings revisions tend to outperform.

Qualifying stocks have outperformed their local benchmark index by 15% or more over the last six months. In addition, they rank in the top 20% of all stocks in each region based on the percentage increase in earnings estimates over the last month.

The Shares team have used their collective knowledge and wisdom to select the best stocks from the qualifying stocks.

 

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MOMENTUM PICKS

CLARKSON (CKN) £38.75 

Market Cap: £1.2 billion

Founded in 1852, the age of sail, today Clarkson (CKN) is the world’s biggest provider of shipping services, from broking to port services, research and financial advice, with offices in 24 countries across six continents.

 

The firm reported record profit for 2023, allowing it to increase its dividend for the 21st year running and sending its shares to a new 12-month high.

The company has an immensely strong balance sheet with £175 million of free cash and its secured order book for 2024 was a record $217 million in December.

Seaborne trade continues to grow, but for the past few years lack of supply means rates have kept rising along with demand for Clarkson’s services.

Added to this, the ‘green transition’ is fueling demand for new vessels, both in terms of low-emissions and for the offshore wind industry, and we expect the company to continue growing faster than analysts anticipate. [IC]

 

CRANEWARE (CRW:AIM) £20.95

Market cap: £747.7 million

The Edinburgh headquartered software solutions supplier helps US hospitals and other healthcare providers discover, convert and optimise assets to improve clinical outcomes and financial performance. US healthcare is savagely competitive so gaining any value-based care edge could be the difference, leaving Craneware (CRW:AIM) well positioned.

 

The AIM-quoted company is widely perceived to have best-in-class tools, capable of accessing, extracting and aggregating data in ways peers cannot, allowing relevant, meaningful insights to be drawn and patient outcomes to be optimised.

After collapsing during Covid, operating margins have substantial room to improve and presuming end-market dynamics continue to stabilise, onboarding new healthcare 

clients to its cloud-based Trisus platform could provide a double-benefit for the share price. Having traded above £30 pre-Covid on half last year’s $174 million sales, we see scope for material gains over the next two to three years. [SF]

 

KONINKLIJKE  BAM (BAMNB:AMS) €3.37

Market Cap: €950 million

Based in Bunnick, on the outskirts of Utrecht, Koninklijke BAM (BAMNB:AMS) is one of the Netherlands’ biggest construction groups, specialising in sustainable homes and infrastructure for public and private customers.

 

While construction is a low-margin business, the firm is improving its profitability as shown by its 2023 results which have led analysts to upgrade their 2024 and 2025 forecasts by around 40%.

BAM has a strong balance sheet and an order book of almost €10 billion, giving it the confidence to raise the dividend by a third and launch a €30 million share buyback.

As part of its new three-year strategy the company will pay out between 30% and 50% of earnings as dividends and will continue with share buybacks.

For investors keen on green credentials, the firm has ambitious decarbonisation targets and has already reduced its Scope 1 and 2 CO2 intensity by more than 50% since 2015 with further reductions planned. [IC]

 

META PLATFORMS (META:NASDAQ) $496.09

Market cap: $1.3 trillion

In January 2024, Meta Platforms (META:NASDAQ) blasted back past the trillion-dollar market capitalisation mark after chalking up one of the greatest stock market comebacks ever in 2023. Last year, shares in the Facebook, Instagram and Whatsapp-owner surged 195% thanks to reinvigorating sales growth in its advertising business and taking the knife to costs.

 

February’s fourth quarter smashed forecasts, saw a massive $50 billion share buyback plan put in place and declared a dividend for the first time. Its market cap gain of nearly $200 billion was the biggest one-day rally for an individual stock on record.

The widely held opinion among analysts is that investors can expect more to come from the shares. Bank of America analysts reckon Meta will benefit from a further improvement in digital advertising and its Reels short videos, among other areas. Trading on a three-year average PE of 21.4, we think the upside potential is potentially significant. [SF]

 

NEXT 15 (NFG:AIM) 939p

Market cap: £924.9 million

Over the past six months shares in London-based digital marketing and consulting firm Next 15 (NFG:AIM) have gone up around 50%.

 

Berenberg analyst Ciarán Donnelly says: ‘The convergence of advertising and technology is extending marketing budgets to technology-enabled areas of corporate spending, leading to a growing set of opportunities for tech/data-enabled media companies.’ Donnelly notes Next 15 focuses on building out a consortium of digital consultant and data analytics brands, alongside its well-established content and branding businesses, leaving it well positioned against the structural backdrop. 

A combination of smart bolt-on deals and new business wins are helping to drive share price and earnings momentum. Next 15 has managed to tap into high growth areas like data analytics and artificial intelligence (AI) by buying five businesses from these specialist areas. In November 2023 the company outlined plans to double revenue within the next five years. [SG]

 

SHAKE SHACK (SHAK:NYSE) $100.96

Market cap: $4.42 billion

Growth-hungry investors have chased Shake Shack (SHAK:NYSE) shares almost 40% higher year-to-date, with the burger chain’s well-received fourth quarter results (15 February) and a strong 2024 outlook providing further fuel for the rally. Shares believes the American restaurant chain can sustain its positive momentum as consumers continue to chow down on its tasty hot dogs, Angus beef burgers, crinkle-cut fries and namesake milkshakes and price increases and Shake Shack’s increased scale drive higher-than-expected margins.

 

The modern day ‘roadside’ burger stand remains at the foothills of its global growth opportunity and is seeing positive traffic in its restaurants and through digital channels.

For 2024, Shake Shack expects to grow total revenue by 11% to 15% to between $1.21 billion and $1.25 billion opening 80 new restaurants. This would bring the total, including company-operated and licensed ‘Shacks’, to almost 600 locations, more than double the footprint from five years ago. [JC]

 

SHARKNINJA (SN:NYSE) $55.38

Market cap: $7.76 billion

SharkNinja’s (SN:NYSE) shares have surged more than 60% over the past six months, propelled by the household appliance innovator’s positive earnings momentum.

 

The fast-growing company behind the Shark and Ninja brands designs appliances ranging from smart vacuum cleaners and air fryers to hairdryers. It has a massive global market opportunity to attack and is benefiting from robust, higher margin direct-to-consumer sales.

Shares believes the stock has scope to swim higher as new product launches drive market share gains and upwards earnings revisions.

Cash-rich SharkNinja’s sales rose 16.5% to almost $1.38 billion in the fourth quarter to December 2023 including Christmas, while adjusted EBITDA shot up 71% to over $219 billion, demonstrating the operational gearing in the business. 2024 guidance points to adjusted EBITDA of between $800 million and $830 million, implying growth of 11% to 15% and CEO Mark Barrocas says SharkNinja’s brands have ‘strong momentum’ heading into 2024 as the Massachusetts-headquartered firm continues ‘to introduce new products, enter new categories, and grow our international footprint’. [JC]

 

STELLANTIS (STLAM:BIT) €25.10

Market cap: £64.7 billion

Car maker Stellantis (STLAM:BIT), formerly known as Fiat Chrysler has seen its shares run-up 50% over the last six months while consensus earnings forecasts have been revised up around 15% over the last 12-months.

 

In addition to strong price and earnings momentum, the shares sit firmly in the ‘value’ category with a PE (price to earnings) ration of 5.5 times expected 2024 earnings.

Stellantis should continue to benefit from both value and momentum factors which are both powerful drivers of stock returns.

The business is showing good momentum and continues to throw off lots of cash. Commenting on full year results (15 February) analysts at JPMorgan said, ‘All in all, a very strong year confirming the strong industrial execution on a global basis.’

After returning €6.6 billion to shareholders via dividends and buybacks in 2023, the world’s third largest car maker by revenue launched a further €3 billion share buyback and raised the dividend by 16% to €1.55 per share. [MG]

 

UBER TECHNOLOGIES  (UBER:NASDAQ) $78.60

Market Cap: £128.3 billion

Ride-hailing and food delivery company Uber Technologies (UBER:NASDAQ) has been on a tear with its shares rising 70% over the last six months compared with a gain of 16.6% gain in the Nasdaq Composite index.

 

Strong price momentum has been supported by upward earnings revisions with analysts doubling their 2024 EPS (earnings per share) estimates over the last year according to Refinitiv data.

Shares believes the company has reached an inflection point where it can now sustainably generate profits and free cash flow.

With the business operating at global scale operational efficiencies should act as a positive tailwind for margins going forward.

Uber’s surprise inaugural $7 billion share buyback (14 February) demonstrates management’s increasing confidence in the business.

Over the next three years Uber expects gross bookings growth in the mid-to-high teens percentage and adjusted core operating profit in the high 30% to 40% range. [MG]

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