For much of the past decade, equity investors have enjoyed a remarkably supportive backdrop.
Corporate earnings have grown, economies have recovered and innovation has created new market leaders. But another force has quietly played an equally important role: investors have become increasingly willing to pay higher prices for future earnings.
That expansion in valuations has been a significant contributor to equity returns.
The question now is whether investors can rely on the same tailwind over the next decade.
A Different Investment Environment
Today’s market looks very different from the one that followed the Global Financial Crisis.
Interest rates are structurally higher, inflation remains less predictable and valuations across parts of the market continue to reflect high expectations for future growth.
If multiples stop expanding, future equity returns are likely to depend far more on the underlying performance of the businesses investors own.
That shifts the focus back to fundamentals.
The Return Drivers That Matter
Over the long term, companies create shareholder value by growing earnings, generating cash and allocating capital effectively.
Markets may become captivated by themes and narratives, but ultimately investment returns are supported by the ability of businesses to compound value over time.
For investors, this raises an important question.
Should the focus be on owning the companies that have performed best, or on identifying those capable of continuing to create value from today’s starting valuations?
We believe the distinction matters.
Quality Needs a Second Discipline
Quality investing has long been associated with durable businesses, resilient earnings and competitive advantages.
These characteristics remain attractive. But quality alone is not enough.
Even exceptional businesses can become disappointing investments when expectations become too optimistic and valuations detach from fundamentals.
That is why we believe quality and valuation should never be considered separately. The businesses investors own matter. The price they pay matters just as much.
Putting the Philosophy Into Practice
This philosophy underpins Thornburg Equity Income Builder.
Rather than pursuing the highest-yielding stocks or simply following benchmark weights, the strategy seeks global companies with durable business models, disciplined capital allocation and the potential to grow shareholder distributions over time. Every investment is evaluated not only on the strength of the business, but also on whether today’s valuation offers an attractive long-term return opportunity.
In an environment where future market returns may be driven more by business fundamentals than valuation expansion, we believe this combination of quality and valuation discipline is becoming increasingly relevant.
By Josh Rubin, Client Portfolio Manager, Thornburg Investment Management
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