October 19, 2023
By Peter Bower
Our stock market has some of the biggest disparities we have ever seen. Seven mega-cap stocks have driven all the returns for the S&P 500 this year. These are trading at over 40 times earnings. The rest of the 500 stocks in the index are trading closer to 14 times their earnings and are basically flat in return for the year. The weighted average of the whole, around 19 times earnings, seems to indicate that the stock market is expensive, but is it?
Middle sized as well as small-capitalization companies trade at even lower price/earnings ratios. Mid-caps are at 12.7, and small companies are trading at 11.9 times next year’s expected earnings. Mid-cap returns are flat, and small caps are down about 4% for the year.
Anyone who says that the stock market is expensive is only referring to the very small segment of seven mega-cap stocks. This is such an aberration that it cannot last. The big question is how will these stark differences resolve? The Bull and his partners believe that the anomaly is the excessive valuation of the so-called “Magnificent Seven.” Either these stall for years as the rest of the market catches up or they correct. If they do correct, there will be pressure on the popular S&P 500 index, since they are such a big part of it.
No matter how the normalization comes about, value and opportunity are with all the other stocks and categories. This market is not expensive, just a small segment. Stay steady my friends.
The Lonely Bull
