The euphoria in markets continued last week – with the S&P 500 notching a new record high – taking out the 4817 high from Jan 2022. Thanks largely to the Fed signaling peak rates in combination with inflation trending lower – markets now believe a ‘soft landing’ is possible. That is, inflation ultimately trends back to the Fed’s objective (2.0%) without any negative impact to the broader economy (e.g. widespread job losses). We will see how that turns out – as the Fed is attempting to thread a narrow needle. From mine, a soft landing remains a lower probability outcome. However, I believe there is still opportunity… and it’s not with large cap tech stock.
Bifurcated Markets Usually End the Same Way
If you’re long the market – it was another rough week. My portfolio was no exception. My largest position (Google) was smoked – losing around 10%. The Index is now only up 7.24% for the year…. a long way from almost 20% higher in June. The next hurdle for the market comes next week – when we get payrolls. A soft print might give the market hope the Fed is almost done. However, if it comes in hot, the Fed may have no other choice but to hike again in December… given the uncomfortably high Core PCE last week.
Apple: An Incredible Business – But Don’t Overpay
This week the final two mega-cap tech names reported Q2 earnings. Amazon handily exceeded what were very low expectations. AWS (Cloud) sales rose 12% year over year – much better than feared – given the soft results reported from Microsoft’s Azure. This sent the Cloud and eCommerce giant higher by ~11% . On the other hand, investors had a very different reaction to Apple’s earnings. The iPhone maker’s results were mostly inline. But “inline” is not good enough when it’s trading ~30x to 31x forward earnings. So what is the right multiple to pay for Apple? And can it reignite growth looking ahead?
Stocks Are Not Cheap
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)
For a full list of posts from 2017…