👉(17 Incredible Views) Investment Strategy Committee
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(17 Incredible Views) 👇
EQUITY-MARKET GAINS HAVE BEEN DOMINATED BY U.S. MEGA-CAP TECHNOLOGY 🔔
(1) 🚨 “Global stocks extended their gains in the past quarter, but their performance so far this year has been increasingly concentrated to just a handful of names.”
(2) ✔ “The “Magnificent 7” - the largest U.S. publicly listed companies - have benefited tremendously from emerging trends in artificial intelligence (AI), which have propelled valuations of these stocks to especially demanding levels.”
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(3)✔ “The group now makes up over a quarter of the S&P 500 Index’s market capitalization and has delivered outsized gains of 70% so far this year, contributing to almost three quarters of the S&P 500’s 17% gain over that period.”
(4)✔ “Returns offered by the rest of the market, however, pale in comparison. The equal-weighted S&P 500, a better representation of how the average stock has performed, is up just 5.8%.”
(5)✔ “As a result, the performance of the S&P 500 is masking the fact that underlying market breadth has been relatively poor - often an indication that the economy is struggling or set to weaken.”
(6)✔ “Although global equity-market valuations are not unreasonable, earnings are vulnerable to a contraction in economic activity, which limits the potential upside in stocks.”
(7)✔ “In this late-cycle environment, we are looking for low-to-mid-single-digit returns for stocks, with relatively worse outcomes from U.S. equities due to their higher valuations and the influence of expensive mega-cap technology names that could falter if the economy entered a downturn.”
GLOBAL STOCKS VALUATION
(8)✔ “Valuations for global stocks are reasonable relative to their own histories and especially on a relative basis compared with the U.S. Our GDP-weighted composite of global equity markets suggests that stocks are appropriately valued or, in some cases, even slightly below fair value.”
(9)✔ “And if we remove the U.S. from the calculation, global equities would be situated at 17% below fair value.”
(10) ✔ “Note that this composite had been as much as 34% above fair value in late 2021, so there has been a meaningful improvement in valuations over the past 18 months, with most of that adjustment taking place outside of the U.S. large-cap space.”
(11) ✔ “Among major markets, the S&P 500 is the most expensive at almost half a standard deviation above fair value, while markets in other regions are either slightly or significantly below their fair value estimate.”
MAGNIFICENT 7
(12) ✔ “We ran a break-even analysis to determine how fast these companies would need to grow their earnings in order to justify their premium prices.”
(13) ✔ “The chart above lists the assumptions and results of the analysis, which compares two earnings trends.”
(14) ✔ “The first set is the earnings of the S&P 500 excluding the Magnificent 7, which is assumed to grow at its historic trend of 6.2% without the influence of those seven tech darlings.”
(15) ✔ “The second set solves for the rate of growth required for Magnificent 7 profits to equal the first set’s over a specified number of years, discounted using an appropriate rate.”
(16) ✔ “One result is that, over a 10-year period, the Magnificent 7 would have to increase their profits by 36.7% per year - just over double the historic trend for this group - to make up for the premium price being paid for their shares today versus the rest of the S&P 500.”
(17) ✔ “The math suggests the bar is set extremely high and these companies could be vulnerable if they were to disappoint investors’ lofty expectations, potentially weighing heavily on major equity indices.”
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Disclosure
This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This material has been prepared for informational purposes only. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.