Priced for Perfection

Immediately below are a series of stock market index returns for the year-to-date period ended February 23, 2024. The S&P and NASDAQ are in a dead heat lead while other indexes lag. Here are the big takeaways from the chart below. 1) The equally weighted S&P 500 Index lags the S&P by 4.5%. This is evidence that market leadership continues to be narrowly focused in big cap tech (more on that below). 2) Smaller Cap stocks continue to lag the broad market with the Russell 2000 Index of small cap stocks posting a small loss year-to-date. 3) Dividend Aristocrats stocks continue to lag the S&P as dividend growth stocks continue to be out of favor.

Immediately below is a chart of the year-to-date return for a handful of these large cap tech stocks. NVIDIA and Meta are the clear and dominant winners so far. But we can also see above benchmark returns are narrow indeed. Tesla, Apple, and Alphabet are lagging the indexes. It’s just a select few stocks that are beating the market. Among these are the two mentioned above plus Netflix, Amazon, and Microsoft.

The implications of this continuing narrowness for valuation sensitive investors are meaningful. It is true that growth (revenue and earnings) within the US economy is concentrated in the big cap tech stocks. Tech stocks are up because they are experiencing the biggest growth. BUT given how much their stocks are up, the valuation levels of these stocks are high. No way around it, these stocks are expensive and priced for perfection.

At WealthPlan, we continue to emphasize valuation disciplines in our investment offerings. We select investments with a disciplined approach to valuation, attempting to balance what we pay for the growth we are getting from an investment. With respect to the current narrow conditions of capital markets, we do expect that one of two things will occur: either 1) earnings growth will broaden in the economy and spread to a much larger number of companies, or 2) growth will falter in these tech names and their stock prices will correct substantially. Of course, we would like to see the growth broaden so our preferred holdings can participate in the market rally. But, if we happen to see the second scenario unfold, we are far more comfortable knowing that our holdings have valuations that should help them hold up reasonably well compared to highly valued tech stocks in a market sell-off.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing. Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed.

No investment strategy can assure success or completely protect against loss, given the volatility of all securities markets. Statements of forecast and trends are for informational purposes and are not guaranteed to occur in the future. All performance referenced is historical and is no guarantee of future results. Securities investing involves risk, including loss of principal. An investor cannot invest directly in an index.

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 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.

Equal-weight indices include the same constituents as their respective market-cap-weighted indices, but each company is allocated a fixed equal weight in the index at each quarterly rebalance.

The Russell 2000 tracks the roughly 2000 securities that are considered to be US small cap companies. The Russell 2000 serves as an important benchmark when investors want to track their small cap performances versus other sized companies. The Russell 2000 tends to have a larger standard deviation in comparison to the S&P 500.

The S&P MidCap 400® Dividend Aristocrats is designed to measure the performance of mid-sized companies within the S&P MidCap 400 that have consistently increasing dividends every year for at least 15 years.

S&P 500® Dividend Aristocrats® measure the performance of S&P 500 companies that have increased dividends every year for the last 25 consecutive years. The Index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company.

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.