For nearly three decades, MSCI ACWI companies that generated the highest earnings growth also led market performance.
This might suggest a strategy for long-term growth investing:
build a portfolio of stocks based on companies with the highest consensus earnings growth forecasts.
High Earnings Growth
Low Earnings Growth
MSCI ACWI performance by historical 5-year earnings growth quintile. Data based on rolling 5-year returns for periods from 12/31/92 to 12/31/21.
Source: Jennison, FactSet. Average median annualized returns of stocks over rolling five-year periods, ranked by 5-year historical earnings growth quintiles (1=highest, 5=lowest). Quintiles are rebalanced quarterly. Past performance does not guarantee future results.
For illustrative purposes only. Source: Jennison
MSCI ACWI consensus earnings estimates of companies in quintiles 1 and 2 compared to realized earnings growth five years later.
Data based on rolling 5-year returns for periods from 12/31/92 to 12/31/21. Source: Jennison, FactSet. Past performance does not guarantee future results.
But a small fraction of these companies—less than 22%—have historically lived up to consensus earnings growth expectations.
These inefficiencies can be exploited by skilled active investors, who can identify growth opportunities before the market.