The S&P 500 has had a fantastic first 6 months of the year – up almost 15%. That’s a welcomed relief from the miserable 2022. But are stocks now too expensive? What’s the premium investors are being asked to pay? There are a couple of ways we can assess this. For example, we can compare the earnings yield against the risk free rate of return (currently around 5.5% and going up). And whilst it’s always good to maintain some (long) exposure to the market – we need think carefully about how much (and where)
"Asset Allocation"
The One Thing Driving the Market
It’s risk on. That’s the market’s sentiment. Question is whether that risk is worth it? There are only a handful of stocks carrying the market higher – a sure sign of both fragility and bearishness. Are there are only “10” stocks that can grow? We have not seen a market this narrow since the dot.com bust. Now should names like Amazon, Google, Apple, Microsoft, Meta and Tesla pull back from nose-bleed valuations – the whole house comes down with it.
Expensive and Risky
Stan Druckenmiller – one of the greatest investors of all time – is issuing a stark warning. Tread carefully. He echoes much of my sentiment of the past few months; i.e. not only do I think the market is fully valued at 19x forward earnings — it represents meaningful downside risk. What concerns me most is what the market assumes will happen over the next ~6-9 months. E.g., at the time of writing, it sees rates being slashed three times this year. Is that realistic with Core CPI YoY is still traveling around 5.5%? It also sees earnings growth. Will that happen opposite a recession? It’s a long list of assumptions…
A Very Narrow Market
Last week all eyes were on large cap tech earnings. They delivered a mixed bag… but on the whole ‘better than feared’. Q1 earnings didn’t fall off a cliff. Single digit growth (top and bottom line) was largely cheered – which highlights how low expectations were. Next week eyes turn to the Fed. The market has priced in a 25 bps hike for May – but will it be a ‘dovish’ hike – where they offer language to suggest a pause in June? Or will they say “there’s more work to do”?
For a full list of posts from 2017…