Thematic Equity Strategy_ US Growth_ Navigate Volatility with the Reverse DCF

Summary of the Thematic Equity Strategy Conference Call Industry and Company Overview - The conference call focuses on the US Growth sector, particularly the NASDAQ-100 index and its associated stocks, emphasizing the Growth at a Reasonable Price (GARP) strategy. Core Points and Arguments 1. Reverse DCF Framework: The reverse DCF approach is utilized to assess growth rates that markets may be pricing into stocks, which helps define the GARP strategy. This method involves making assumptions about discount rates and terminal multiples to solve for cash flows that equate net present value to price [1][2][28]. 2. Market Volatility: The current market setup indicates a high percentage of NASDAQ-100 market capitalization is facing difficult implicit growth setups, leading to expectations of increased volatility in the US Growth sector [3][30]. 3. GARP Strategy: During periods of volatility, the GARP strategy is emphasized, focusing on stocks where consensus estimates align or exceed market-implied growth rates, potentially reducing reliance on continuous earnings beats to outperform [4][10]. 4. Citi Research Baskets: Citi has created three GARP baskets based on reverse DCF screening for the NASDAQ-100 and top growth themes, including AI, Digital Leisure, FinTech, Video Gaming, and Wearable Tech [5][12]. 5. Magnificent 7 Analysis: The analysis of the "Magnificent 7" (META, AMZN, GOOGL, AAPL, MSFT, NVDA, TSLA) shows varying growth setups, with META having the least onerous setup, while AAPL, MSFT, and TSLA may require stronger performance to meet market expectations [6][35]. 6. S&P 500 Outlook: A target level of 5700 for the S&P 500 is suggested to balance risk-reward dynamics, with a current fair value range around 5500 [8]. 7. Interest Rate Impact: The higher valuation segment of the market, particularly the NASDAQ-100, is facing headwinds from rising interest rates, contributing to a more significant pullback compared to the broader S&P 500 [9]. 8. Valuation Metrics: The NASDAQ-100 is currently at top decile valuation levels, with forward earnings growth expectations also at 20-year highs, leading to a middling PEG ratio compared to historical data [13][14]. 9. Growth Themes Performance: The top growth themes (AI, Digital Leisure, FinTech, Video Gaming, Wearable Tech) are highlighted for their attractive growth trajectories and reasonable valuations, although AI is noted to have the toughest growth setup [40][46]. Important but Overlooked Content 1. Market-Implied Growth Setup: The current market-implied growth expectations for the NASDAQ-100 are more challenging than in previous years, indicating a need for stocks to exceed analyst expectations to perform well [27][30]. 2. Sector Allocations: The sector allocations within the GARP baskets reveal a significant concentration in Information Technology, particularly in the cap-weighted basket [59][66]. 3. Investment Strategy: Investors are advised to selectively add growth names on pullbacks, with an acknowledgment of potential volatility ahead, suggesting a cautious approach to broader positioning [67]. This summary encapsulates the key insights and strategic recommendations from the conference call, providing a comprehensive overview of the current landscape in the US Growth sector and the NASDAQ-100 index.