Market Valuations and Big Cap Tech
At the midway point of this current earnings season, FactSet has reported that both earnings and revenue are up over 2% from a year ago. This resumed growth lends credence to arguments that—after a shallow earnings recession—corporate earnings growth has resumed. We will be monitoring earnings as they come in over the next couple of weeks but are encouraged by this return to growth so far.
Despite the nascent return to growth, stocks have remained in their funk that began in the third quarter. October witnessed additional erosion of stock returns. Here’s what market returns look like since the first of August:
Stocks and bonds are both down, with the tech-heavy NASDAQ stock index leading the way. From our perspective, this is welcome news as we think stocks were a bit expensive after the rally this year. Going forward, we feel more encouraged that stock valuations are a bit more reasonable even as earnings growth resumes.
While stocks are somewhat expensive, we see higher valuation levels in the biggest cap stocks. To wit, here are the top ten capitalization stocks in the S&P 500 Index and their P/E ratios:
These ten stocks account for approximately 30% of the total capitalization of the S&P 500 Index. As such, their higher P/E’s distort the index P/E. If one were to strip these stocks out, the overall P/E of the market is much more reasonable. Our view is that the market likes these big cap tech names a lot right now (NVDA, AMZN, and TSLA). The market expectations for their prospective growth are through the roof. These companies will need to deliver to grow into their valuations, but we might find the valuations prove to be somewhat of a head wind as they produce earnings results in the coming quarter. Also, any fundamental misstep and their shares will likely be harshly treated.
Overall, we are cautiously optimistic that the market will not be substantially lower into the close of the year and remain open to the possibility a Santa Claus rally may once again occur come December.
The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. The S&P 500 index is regarded as one of the best gauges of prominent American equities’ performance, and by extension, that of the stock market overall.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market. The composition of the NASDAQ Composite is heavily weighted towards information technology companies.
The NASDAQ-100, whose components are a subset of the NASDAQ Composite’s, accounts for over 90% of the NASDAQ Composite’s movement, and there are many ETFs tracking its performance.
The Bloomberg US Aggregate Bond Index (^BBUSATR) is used as a benchmark for investment grade bonds within the United States. This index is important as a benchmark for someone wanting to track their fixed income asset allocation.
Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment.
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