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e're analyzing Alexandria Real Estate Equities, Inc. (NYSE:ARE) in the context of Goldman Sachs' list of 42 stocks with the highest consensus returns on equity (ROE). As we head into the fourth quarter of 2024, market narratives are shifting due to the Federal Reserve's interest rate cycles and their impact on businesses and cyclical stocks.
Morgan Stanley recently released two reports that highlight the changing economic landscape. In its September report, MS outlined three scenarios for the S&P index's performance by year-end, with the best-case scenario predicting a closing of 5,650 points. However, the market has outperformed even this optimistic forecast, reaching 5,764.
MS also notes that inflation is finally dropping in America, as evidenced by the S&P's second-quarter earnings performance. This shift in inflationary trends has led to new highs for sales and earnings surprises over the past decade. MS' data shows that when inflation was soaring in Q4 2022, EPS surprises were in the lowest quintile, but now they're in the uppermost quintile.
Given the interest rate environment, MS commented on its expectations for future cuts. The bank initially thought markets were expecting 100 basis points of cuts by year-end, but this has remained unchanged after the September 50-basis-point cut. MS' data shows that when economic activity is strong, equities tend to outperform.
In its October report, MS cautions that while historically equities have outperformed following the first Fed rate cut, elevated valuations and consensus forecasting of EPS acceleration may limit upside this cycle. However, MS notes that cyclical stocks are poised for improvement as upward economic growth surprises soften.
These factors are crucial when analyzing Goldman Sachs' list of stocks with high expected ROE, as the bank believes stock quality will be determined by economic growth and interest rates. GS recently upped its 2024 closing target for the S&P to 6,000 points, accompanied by optimism for the index's earnings.
Alexandria Real Estate Equities, Inc. (NYSE:ARE) ranks third on Goldman Sachs' list with a consensus ROE of 47%. The REIT owns and operates office and laboratory properties primarily used by the life sciences industry, which has been affected by constrained funding and oversupply in the market. However, ARE enjoys several advantages within its sector, including proximity to research clusters and large-cap tenants.
ClearBridge Investments mentioned ARE in its Q2 2024 investor letter, highlighting its potential to benefit from a narrowing spread between capitalization rates and financing costs, as well as lower interest rates.
