Continuing my snapshot on earnings, today I reflect on how much big tech has altered the S&P 500’s average valuation, making it look more expensive than it is. Those 7 stocks (MAGMA – Microsoft, Amazon, Google, Meta, and Apple + Tesla and Nvidia) currently weight 27.4% of the index, yet their valuation – with a forward P/E of 30x – brings the broader index’ average to 19x (while the rest of the market is trading at 17x, in line with historical average). While it does seem expensive, by the end of 1999 the S&P 500 was trading at 24x, and some of the bellwethers in their heyday at a hard-to-stomach valuation of 100x forward sales (not earnings). The quicker they rise, the harder they fall – so definitely not wishing for a repeat of 2001-2003. Once again my message is the same: earnings will have to pick up from there. If they don’t, then current valuations are unsustainable while having to cope with missed estimates and revised growth patterns. I do hope that the Atlanta Fed GDPNow forecast of +5.6% for 3Q23 will be a tailwind for all companies.

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Chart from Goldman Sachs H/t ISABELNET.com

Inflection Point Tom Baldacci http://www.inflectionpoint.blog