Magnificent Expectations

Market prices reflect what investors expect to happen in the future. When a group of stocks delivers returns far above the broad stock market, it’s likely these companies surprised investors in a good way.

This principle is challenging to uncover in the data because the market’s expectations are hard to quantify, even with the benefit of hindsight. Sure, we can compare a company’s reported earnings against what was forecast by analysts. But there’s dispersion in analysts’ forecasts. And sometimes earnings reports are accompanied by messaging from the company about its future business that impacts prices. So, a company can beat its earnings forecast and still experience a price decline.

All that said, sometimes we see strong indicators of earnings surprises. Recent years for the Magnificent 7 stocks are a good example. From 2021 through 2025, aggregate earnings for these companies exceeded average beginning-of-year expectations in all but one year, 2022. Their stocks outpaced the broad market in all but one year. I bet you can guess which year they underperformed.

Obviously, we don’t yet have 2026 results. But forecasted earnings for the Mag 7 are even higher this year. That means a potentially higher bar these companies must clear such that they can deliver outsized returns

If you'd like to discuss how these themes relate to your own financial planning objectives, and to assess whether your portfolio is appropriately diversified rather than overly concentrated in the Magnificent Seven, please feel free to get in touch.

Risks : Buying Investments can involve risk. The value of your Investments and the income from them can go down as well as up and is not guaranteed at anytime. You may not get back the full amount you invested. Information on past performance is not a reliable indicator for future performance.

In USD. Source: Dimensional and FactSet, calculated by Dimensional. The Magnificent 7 stocks are represented by Tesla, Meta, Alphabet, Amazon, Nvidia, Apple, and Microsoft. Magnificent 7 Returns are a weighted average of the seven companies. Beginning of Year Earnings Forecast is the sum of average next 12-month net income analyst estimates for each Magnificent 7 stock as of December 31 of the prior year. End of Year Earnings is the sum of actual reported trailing 12-month net income for each Magnificent 7 stock as of December 31 for the stated year. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
S&P data © 2026 S&P Dow Jones Indices LLC, a division of S&P Global.

Risks : Buying Investments can involve risk. The value of your Investments and the income from them can go down as well as up and is not guaranteed at anytime. You may not get back the full amount you invested. Information on past performance is not a reliable indicator for future performance. This information is intended for educational purposes and should not be considered a recommendation to buy or sell a particular security. The views expressed here are subject to change without notice and we can’t accept any liability for any loss arising directly or indirectly from any use of it.

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Value vs Growth

Historically, value stocks have outperformed growth stocks in the US (the largest stock market in the world) often by a striking amount. Data covering nearly a century backs up the notion that value stocks—those with lower relative prices—have higher expected returns.

While disappointing periods emerge from time to time, the principle that lower relative prices lead to higher expected returns remains the same. Value premiums have often shown up quickly and in large magnitudes. For example, in years when value outperformed growth, the average premium was nearly 15%. On average, value stocks have outperformed growth stocks by 4.0% annually in the US since 1927, as Exhibit 1 shows.

A consistent focus on value stocks is essential to capturing these outsize value premiums when they appear. Value investing is based on the premise that paying less for a set of future cash flows is associated with a higher expected return. That’s one of the most fundamental tenets of investing. Logic and history support a commitment to value stocks so investors can be positioned to take part when those shares outperform in the future.

Risks:Buying investments can involve risk. The value of your investments and the income from them can go down as well as up and is not guaranteed at any time. You may not get back the full amount you invested. Information on past performance is not a reliable indicator for future performance.

Fama/French Indices: The Fama/French indices represent academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment.
Currency and Premiums: In US dollars. Yearly premiums are calculated as the difference in one-year returns between the two indices described.
Value Minus Growth: Fama/French US Value Research Index minus the Fama/French US Growth Research Index.
Fama/French US Value Research Index: Provided by Fama/French from CRSP securities data. Includes the lower 30% in price-to-book of NYSE securities (plus NYSE MKT (formerly AMEX) equivalents since July 1962 and Nasdaq equivalents since 1973).
Fama/French US Growth Research Index: Provided by Fama/French from CRSP securities data. Includes the higher 30% in price-to-book of NYSE securities (plus NYSE MKT (formerly AMEX) equivalents since July 1962 and Nasdaq equivalents since 1973).
Backtested Performance: Results shown during periods prior to each index's inception date do not represent actual returns of the respective index. Other periods selected may have different results, including losses. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains.

GLOSSARY
Value Stock: A stock trading at a low price relative to a measure of fundamental value such as book equity.
Growth Stock: A stock trading at a high price relative to a measure of fundamental value such as book equity.
Value Premium: The return difference between stocks with low relative prices (value) and stocks with high relative prices (growth).

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Outpacing Inflation with Stocks

Inflation is back in the news of late, as the year-over-year change in the consumer price index is at the highest level since 2023 in the US which is the worlds largest economy. This may stoke fears of further inflation for many investors.

It’s important to note that expected inflation is incorporated into the expected returns demanded by market participants. To the extent inflation is expected to impact either future cash flows from an investment, or the discount rate applied to these cash flows, market prices adjust to compensate, resulting in positive expected real returns. This is borne out in historical data. Average real returns for the broad US stock market, based on the S&P 500 Index, have been positive even in years when US inflation was above the historical median. Average real returns for US small cap and small cap value stocks have been even higher, implying investors should not shy away from tilting toward higher expected return stocks even if inflation expectations are elevated.

We believe one way for investors to deal with inflation is to outpace it. Stocks have been a good way to do this historically, as the evidence from the US illustrates.

To review the diversification of your own investments feel free to get in touch.

In USD. US inflation is the annual rate of change in the consumer price index for all urban consumers (CPI-U, not seasonally adjusted) from the US Bureau of Labor Statistics. Nominal return is the rate of return on an investment without adjusting for inflation. Real return is the rate of return on an investment after adjusting for inflation. Real returns are calculated using the following method: [(1 + nominal return) / (1 + inflation rate)] – 1. The Dimensional indices represent academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment.
See “Index Descriptions” in the appendix for descriptions of the Dimensional index data.
S&P data © 2026 S&P Dow Jones Indices LLC, a division of S&P Global. Indices are not available for direct investment.

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Key steps to take before the tax year ends

With the 2025/26 tax year-end approaching, now is the time to act to maximise your financial opportunities. Key priorities include using your £20,000 ISA allowance for tax-efficient growth and contributing up to £60,000 (or more if carry forward is available and relevant earnings are sufficient) to your pension to take advantage of tax relief and long-term benefits. Other allowances, such as Capital Gains Tax, Dividend Allowance and Junior ISAs, are ‘use it or lose it’ opportunities. On page 08, we explain why early action avoids last-minute stress, secures tax savings and ensures financial growth.

With rising life expectancy, more of us will need long-term care, making early financial planning essential. Fees have surged, and regional cost disparities add to the challenge. Funding options include annuities, insurance, investments and equity release. On page 12, we consider how professional advice is crucial for navigating tax implications and securing a sustainable plan for future care needs.

Inheriting wealth can be life-changing but comes with challenges. On page 28, we explain why holding excessive cash may not be the best choice as inflation erodes its value. Instead, consider diversified investments to foster growth. Align your strategies with your goals, whether it’s retirement or supporting your family, and seek professional advice to maximise tax benefits and avoid pitfalls.

Financial uncertainty is growing, with many feeling life is unpredictable. Rising inflation, energy costs, and tax increases fuel concerns, prompting shifts such as increased cash savings and delayed retirements. While saving is important, balancing short-term needs with long-term investments is key. Reviewing pensions and seeking advice builds resilience and confidence. Turn to page 06.

A complete list of the articles featured in this issue appears opposite page and on page 03.

Wealth planning for your future

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MARKET INSIGHTS: The Cost of Trying to Time the Market

Considering how dire the headlines and stock price moves appeared to be in April with the Tariff headlines I know it’s tempting to move to the sidelines and delay making investments or even sell and wait and see how things develop with a view to ‘re-entering the market’ when valuations might be more attractive and the outlook clear. The problem is the evidence suggests that approach rarely works out! With new record highs being made in the US stock market last week I thought it’s worth reflecting on this.

The impact of being out of the market for a short time can be profound, as shown by this hypothetical investment in the MSCI World Index, a broad Global stock market benchmark.

A hypothetical £1,000 investment made in 2015 turns into £3,214 for the 10-year period ending December 31, 2024.

Miss the MSCI World’s best week, and the value shrinks to £2,940. Miss the best three months, and the total return falls to £2,498.

There’s no proven way to time the market—targeting the best days or moving to the sidelines to avoid the worst. Staying invested and focused on the long term helps to ensure that you’re in position to capture what the market has to offer.

In GBP. For illustrative purposes. Best performance dates represent end of period (April 08, 2020, for best week; April 14, 2020, for best month; June 18, 2020, for best three months; and September 15, 2020, for best six months). The missed best consecutive days examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best consecutive days, held cash for the missed best consecutive days, and reinvested the entire portfolio in the MSCI World Index (net div., GBP) at the end of the missed best consecutive days. Data presented in the growth of £1,000 exhibit is hypothetical and assumes reinvestment of income and no transaction costs or taxes. The data is for illustrative purposes only and is not indicative of any investment. MSCI data © MSCI 2025, all rights reserved.
Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

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Market Insight: Sweeping changes

Welcome to our latest issue. The October 2024 Budget proposed sweeping changes to Inheritance Tax (IHT), significantly tightening the laws that were previously more forgiving for families with trading businesses and farmland. Effective from April 2026, these types of assets will now incur IHT at a reduced rate of 20% on valuations exceeding £1 million. On page 04, we consider why the changes are leaving many families scrambling to reassess their estate planning strategies.

Ten years ago, pension freedoms revolutionised how people access their retirement savings. These changes offered savers over 55 greater options to withdraw and manage their pension pots. However, a decade later, research indicates that many individuals are making critical financial decisions without seeking advice or fully understanding the tax implications. Read the full article on page 03.

A complete list of the articles featured in this issue appears on page 02.

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