Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 523

Global consumer and corporate resilience surprises everyone

  •   Qiao Ma
  •   23 August 2023
  • 1
  •      
  •   

Despite months of predictions for a global recession, consumer activity and corporate earnings are holding up surprisingly well. We believe that global long-term interest rates probably peaked in October last year, and we are now observing encouraging signs of the start of corporate earnings re-acceleration.

Clearly, we are not completely out of the woods yet. Inflation is still sticky and further rate hikes are expected over the next few months, but when we look under the hood at the companies we research, resilience stands out.

This global resilience has been surprising to all of us. In Europe, consumers seemed to sail through a severe energy crisis last winter, and in the US, consumer activity in both discretionary and staples has far exceeded most expectations at the beginning of the year.

What’s going on?

Higher global interest rates and inflation have impacted the consumer, but tight labour markets have tempered any slowdown. With global unemployment projected to be around 5.3% this year (according to the International Labour Organisation), and lower than it was pre-pandemic, anybody who wants to be employed generally is. It also means employers may need to pay employees more to retain them.

Projections for a US recession remain. However, companies that sell to the consumer on a daily basis, and have been watching and waiting for a slowdown, have not seen it materialise over the past 18 months. Clearly, consumption has been more resilient than expected, especially around the trends of health and wellness.

Corporate earnings improving

Stocks are not the economy – Q2 sees a return to earnings growth

Source: Company earnings calls, Bloomberg Finance L.P. 8 May 2023

As a result of this better-than-expected consumption, the market has been returning to a more normalised environment, where share prices follow earnings. This has been particularly the case with the big US tech companies like Microsoft and Google (parent company Alphabet), which reported late July.

Microsoft and Google both reported approximately 8 per cent revenue growth on an organic basis. And despite the dip in Microsoft's share price following its announcement, these companies - arguably two of the best managed businesses in the world - have forecast for potentially higher growth in the second half. Over the past three years, management teams have focussed on two things – de-risking the businesses and improving discipline around expenses.

This combination of corporate resilience and consumer resilience has resulted in earnings resilience which gives us confidence for a strong second half of the year and robust 2024.

AI developments

The start of an artificial intelligence (AI) super-cycle will also likely accelerate the rate of innovation across many industries for years to come. This is the other factor that underscores our confidence in the market. The advancements that started with the launch of ChatGPT in November 2022, will radically change a wide range of industries, and speed up the innovation cycle.

When announcing his company’s latest results, the chief executive officer of Microsoft, Satya Nadella, said that customers are not just asking how they can use AI but how quickly they adopt AI to tackle the biggest corporate opportunities and risks that they face.

Microsoft case study

Pricing power for AI applications

Source: Microsoft company earnings call, May 2023.

Microsoft is an example of how the value of AI on earnings can be quantified. The company is about to add the AI co-pilot as an add-on to Windows Office 365 suite, at an approximate cost of $30 a month per user. Assuming a small initial discount, that’s an annual user cost of approximately $US300. Suppose a quarter of Microsoft’s current 400 million users sign up to the co-pilot version of Windows Office. In that case, that translates to roughly $US30 billion increase in revenue. Plugging that into consensus expectations for the company represents about a 10 to 15 per cent lift on the earnings per share for the company in financial year 2026.

While Microsoft’s multiple has re-rated in recent months, we believe the consensus earnings are still significantly underestimating the impact that AI will have on the company’s earnings. Based on our estimates, the stock is trading below 25 times June 2025 earnings, which we think is cheap for the leading AI cloud infrastructure and software application company on the planet.

Not all companies will be able to leverage AI in the same quantifiable way as Microsoft, but we do think over the next two to three years we are going to see meaningful earnings upgrades coming from AI.

Looking forward

The more normalised market environment we’ve been observing – of share prices following earnings - bodes well for our investment process of looking for earnings growth opportunities backed by a structural tailwind. Our portfolio is exposed to many different idiosyncratic growth drivers - AI, high performance computing, resilient consumers, as well as industrial companies benefiting from decarbonisation.

AI is the most obvious example of a structural tailwind, and potentially one of the most significant this century, but high-performance computing is another. It is a focus in our portfolio, and we are invested in semiconductor exposed companies, like semiconductor designer Nvidia.

In the accelerated computing market, we believe Nvidia has close to an 80 per cent market share. This places it in a strong position to capture the earnings upside available in the sector, not only from re-tooling data centres to boost the capacity requirements that multiple AI applications necessitate, but also by providing accelerated computing solutions to new data centres being built.

We also anticipate positive performance from the industrial companies driven by spending plans in the US, including the Inflation Reduction Act, which promotes the production of clean energy, and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act.

 

Qiao Ma is a Partner and Portfolio Manager with Munro Partners, a specialist investment manager partner of GSFM Funds Management. GSFM is a sponsor of Firstlinks. Munro Partners may have holdings in the companies mentioned in this article. This article contains general information only and has been prepared without taking account of the objectives, financial situation or needs of individuals.

For more articles and papers from GSFM and partners, click here.

 

RELATED ARTICLES

It's time small and mid-caps play catchup

DigiCo REIT and the data centre opportunity

Unearthing small and mid-cap gems

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

Retirement is a risky business for most people

While encouraging people to draw down on their accumulated wealth in retirement might be good public policy, several million retirees disagree because they are purposefully conserving that capital. It’s time for a different approach.

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Reform overdue for family home CGT exemption

The capital gains tax main residence exemption is no longer 'fit for purpose', due to its inequities, inefficiency, and complexity. Here are several suggestions for adapting or curtailing the concession.

So, we are not spending our super balances. So what!

A Grattan Institute report suggests lifetime annuities as a solution to people not spending their super balances. The issue is whether underspending is the real problem or a sign of more fundamental failings in our retirement system.

Latest Updates

Shares

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

Superannuation

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Shares

The naysayers may be wrong again on the Big Four banks

While much of the investment industry recommends selling the banks, many were saying the same thing 12 months ago. The reporting season shows why bank shareholders should be rewarded for ignoring the current market noise.

Superannuation

Unpacking investment risk in superannuation

Understanding investment risk in superannuation is crucial for your retirement account. Here's a guide on how to define, take, and manage risk to select the right investment mix tailored to your unique circumstances.

Economy

This 'forgotten' inflation indicator signals better times ahead

Money supply provides an early and good read on whether the cash rate setting is transmitting to accelerating, steady or slowing price pressures. This explores recent data on money supply and what lies ahead for inflation.  

Investment strategies

The biggest and most ignored catalyst for emerging market stocks

Relative valuations and superior GDP growth alone are not compelling enough reasons for an improvement in emerging market equity returns. Earnings growth looks more likely to revive the asset class’s strong long-term record.

Property

Has Australian commercial property bottomed?

Commercial property took a beating in recent years as markets adjusted to higher interest rates. From here, strong demand tailwinds and a sharp fall in fresh supply could support solid returns for the best assets.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.