P&C Gut Check: Did Fundamentals Dislocate From Share Price Performance?

Research evidence excerpt

P&C Gut Check: Did Fundamentals Dislocate From Share Price Performance?

IdeaMappear to have had a larger than usual influence on insurance stocks, the market is

rotating towards quality, a classic mid-cycle transition as the business cycle matures,

according to our Equity Strategy team. From here, quality rotation should ultimately

support S&P 500 resilience and even broad participation, albeit with different

leadership. The current setup resembles early-to-mid 2021 ( Exhibit 1 ), when

leadership shifted toward quality after an early cycle rebound post-Covid. Weak

balance sheets, high-beta growth, and low quality earnings factors started to

underperform even as the S&P 500 advanced and growth strengthened. Today

looks similar: our Equity Strategy team's factor work favors high free-cash-flow

yield, low EPS variability, strong balance sheets and high margins. Notably, the

capex/sales factor ( Exhibit 2 ) is no longer being rewarded as the market focuses on

repeatable FCF generation and quality earnings. From an insurance perspective, we

expect fundamentals to become a more important part of share price performance

as rotation towards quality continues.

Exhibit 1: Quality Factor Performance Starting to Rebound, Like It Did in 2021

Quality Composite (High vs Low)

1.4

1.3

Low Quality,

Early Cycle

1.2 Leadership Higher

Quality,

Mid Cycle

1.1 Rotation

1.0

0.9 Early Cycle

Leadership

Higher Quality,

Mid Cycle Rotation

0.8

2020 2021 2022 2023 2024 2025 2026

Source: Compustat, Morgan Stanley Research

Exhibit 2: Low Capex/Sales is Once Exhibit 3: ...While High Capex/Sales

Again Favored as We Move to Mid Lags the Overall Market

Cycle... 1.3 Overall Market Factor Performance: High Capex to Sales (Relative)

Overall Market Factor Performance: Capex to Sales (High vs. Low)

1.2 1.2

1.1