Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 295

The S-curve beats the macro every time

Talk to most investment professionals about their investing style, and they will speak about macroeconomics, interest rates and sector valuations as their primary drivers of decision making. But will this really create investment performance and returns? We believe the macro picture is not the secret to success.

Rather, it is the ability to benefit from structural changes that underpin the earnings growth of companies. It is these companies that will deliver the strongest returns over the long term, regardless of the economic backdrop or point in the cycle.

Market evolution and the few companies that do really well

The key is to recognise what the stock market really is. It is a market of companies, and it is continually changing and evolving. For instance, oil and gas used to be the biggest sectors in the S&P 500 index but today it is technology. General Electric Company (GE) was once the biggest company in the world, but it is now at risk of falling out of the S&P 500, while Amazon – which did not exist 25 years ago – has taken its place, with a market cap of over $800 billion.

It is only a handful of companies that truly create and deliver wealth for investors over the long term. A study in the Journal of Financial Economics by Hendrick Bessembinder (Do Stocks Outperform Treasury Bills, updated 2018) looked at every company that has listed in the US over the past 90 years, and what happened if an investor bought and held every stock.

He found that most companies out of 14,000 in total destroyed value versus Treasury bills, with the vast majority going to zero. A further 8,000 companies made enough to offset what the other 14,000 had lost. And 1,100 companies or only 5% of the total delivered all the return in the US market (above Treasury bills). Of these 1,100, there were actually 50 companies that made up 40% of the entire wealth created in the US stockmarket over that 90-year period.

The trick for investors, therefore, is to identify these 50 companies early on, and buy and hold them.

Sounds simple? Of course, it isn’t.

The S-curve helps identify the wealth creators

This is where the idea of the S-curve comes in. In business terms, the S-curve tracks how a company or industry grows over its lifecycle. There comes a point in the lifecycle when growth inflects, driven by a structural change. It is the tailwind created by the structural change that allows a company to deliver and create wealth.

We argue that the S-curve always beats the macro when it comes to investing.

Companies like Facebook, Amazon and Apple have ridden the wave of demand for technology products and services that did not exist 15 or 20 years ago, but which are now considered indispensable in our daily lives. As investors, we seek to identify the next round of structural changes, and then invest in the companies that will benefit from them, at the start of the S-curve and not at the end.

Apple is a good example here. From 2008 to 2017, while the growth in the overall mobile handset market was relatively flat, smartphone penetration went from less than 10% to roughly 70% over the same period. In 2008, there were 10 mobile phone stocks to choose from but only two really worked out – Apple and Samsung. Once household names like Blackberry, Motorola, Eriksson and Nokia failed to seize the structural growth opportunity in smartphones.

Source: Bloomberg. Click to enlarge.

The smartphone market has now stopped growing and Apple is relying on price hikes and its services revenue for growth. The smartphone industry is now at the end of its S-curve.

Video Streaming and Netflix, on the other hand, is still growing. Yes, Netflix’s earnings multiples are high, and it is not yet making material profits, but what’s important is how much earnings it makes 10 years from now, not what it makes in 2019 or 2020. And on this basis, Netflix is poised for immense growth. It is currently in just 10% of broadband homes around the world, and its monthly pricing is low relative to the value of content it offers, so its potential for earnings growth is huge. Video Streaming is still toward the beginning of its S-curve.

Successful company characteristics

Once we identify industries at the beginning of their S-curve, we then need to find the companies that can fully benefit from the structural change. To do this, we consider five company characteristics that we believe are essential for success:

  • Potential for growth: exhibit faster earnings, EBITDA or revenue growth versus peers and growing Total Addressable Market (TAM).
  • Economic leverage: exhibit pricing power or economic leverage to improve margins.
  • Sustainability: exhibit ability to sustain growth due to scale, position, intellectual property or locational advantages.
  • Control: exhibit strong management ownership and incentives.
  • Customer perception: Exhibit strong customer reviews and rapid adoption.

Companies that display all these characteristics are best placed to capitalise on their structural tailwind. Examples we would highlight today would be Amazon in eCommerce, Danaher in Innovative Health and ServiceNow in Digital Enterprise.

 

Nick Griffin is a Founding Partner and Chief Investment Officer of Munro Partners. This article is for information purposes only and does not consider the circumstances of any investor.

 

banner

Most viewed in recent weeks

Howard Marks: the investing game has changed

The famed investor says the rapid switch from globalisation to trade wars is the biggest upheaval in the investing environment since World War Two. And a new world requires a different investment approach.

Welcome to Firstlinks Edition 605 with weekend update

Trump's tariffs and China's retaliatory strike have sent the Nasdaq into a bear market with the S&P 500 not far behind. What are the implications for the economy and markets, and what should investors do now? 

  • 3 April 2025

Pros and cons of Labor's home batteries scheme

Labor has announced a $2.3 billion Cheaper Home Batteries Program, aimed at slashing the cost of home batteries. The goal is to turbocharge battery uptake, though practical difficulties may prevent that happening.

Designing a life, with money to spare

Are you living your life by default or by design? It strikes me that many people are doing the former and living according to others’ expectations of them, leading to poor choices including with their finances.

World's largest asset manager wants to revolutionise your portfolio

Larry Fink is one of the smartest people in the finance industry. In his latest shareholder letter, the Blackrock CEO outlines his quest to become the biggest player in private assets and upend investor portfolios.

4 ways to take advantage of the market turmoil

Every crisis throws up opportunities. Here are ideas to capitalise on this one, including ‘overbalancing’ your portfolio in stocks, buying heavily discounted LICs, and cherry picking bombed out sectors like oil and gas.

Latest Updates

Investment strategies

An enlightened dividend path

While many chase high yields, true investment power lies in companies that steadily grow dividends. This strategy, rooted in patience and discipline, quietly compounds wealth and anchors investors through market turbulence.

Investment strategies

Don't let Trump derail your wealth creation plans

If you want to build wealth over the long-term, trying to guess the stock market's next move is generally a bad idea. In a month where this might be more tempting than ever, here is what you should focus on instead.

Economics

Pros and cons of Labor's home batteries scheme

Labor has announced a $2.3 billion Cheaper Home Batteries Program, aimed at slashing the cost of home batteries. The goal is to turbocharge battery uptake, though practical difficulties may prevent that happening.

Investment strategies

Will China's EV boom end in tears?

China's EV dominance is reshaping global auto markets - but with soaring tariffs, overcapacity, and rising scrutiny, the industry’s meteoric rise may face a turbulent road ahead. Can China maintain its lead - or will it stall?

Investment strategies

REITs: a haven in a Trumpian world?

Equity markets have been lashed by Trump's tariff policies, yet REITs have outperformed. Not only are they largely unaffected by tariffs, but they offer a unique combination of growth, sound fundamentals, and value.

Shares

Why Europe is back on the global investor map

European equities are surging ahead of the U.S this year, driven by strong earnings, undervaluation, and fiscal stimulus. With quality founder-led firms and a strengthening Euro, Europe may be the next global investment hotspot.

Chalmers' disingenuous budget claims

The Treasurer often touts a $207 billion improvement in Australia's financial position. A deeper look at the numbers reveals something less impressive, caused far more by commodity price surprises than policy.

Fixed interest

Duration: Friend or foe in a defensive allocation?

Duration is back. After years in the doghouse, shifting markets and higher yields are restoring its role as a reliable diversifier and income source - offering defensive strength in today’s uncertain environment.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.