đ The S&P 500 Index has reached its all-time high, which it last touched in January 2022, after 746 days. Using S&P 500 data going back to 1950, we can observe that the average fall during a bear market was 35%. Additionally, it took the market 381 days to reach its lowest point and almost 1,100 days to reach new all-time highs from its prior peak.
đ Letâs take the Shiller P/E ratio, which is calculated by dividing the current price of a market index by the average real earnings (adjusted for inflation) over the past ten years, and it can be used as a good predictor of future expected stock market returns. When this ratio is high (indicating a potentially overvalued market), future returns tend to be lower, and vice versa. Its value is currently at 32.91, a level far above the historical average of 17. At these levels, one could estimate a CAGR for the next 10 years between 3%-5%. Still relatively low values.
đ However, as you have probably heard more than once in recent months, a select group of stocks have been the driving force behind the stock market’s ascent. And once more, it is largely due to these firms’ strength that new highs have been reached. In fact, we observe that the seven stocks representing the 30% of the indexâAlphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Teslaâhave increased by a combined about 117% since the index’s last low in October 2022, significantly outperforming the performance of the other 493 S&P 500 businesses.
đ Understanding the dominant position of Big Tech is therefore important to understand that although a rising S&P 500 is usually a good thing, when this rise is led by only a small number of companies, growth may not be so natural. This enthusiasm in the markets is largely dictated by the scenario that investors have now about a possible rate cut, a soft or no landing of the economy, and future earnings growth. On the other hand, if the economy continues to grow as expected, there may be stocks outside these tech giants that could represent excellent opportunities.
đ The S&P 500 Index has reached its all-time high, which it last touched in January 2022, after 746 days. Using S&P 500 data going back to 1950, we can observe that the average fall during a bear market was 35%. Additionally, it took the market 381 days to reach its lowest point and almost 1,100 days to reach new all-time highs from its prior peak.
đ Letâs take the Shiller P/E ratio, which is calculated by dividing the current price of a market index by the average real earnings (adjusted for inflation) over the past ten years, and it can be used as a good predictor of future expected stock market returns. When this ratio is high (indicating a potentially overvalued market), future returns tend to be lower, and vice versa. Its value is currently at 32.91, a level far above the historical average of 17. At these levels, one could estimate a CAGR for the next 10 years between 3%-5%. Still relatively low values.
đ However, as you have probably heard more than once in recent months, a select group of stocks have been the driving force behind the stock market’s ascent. And once more, it is largely due to these firms’ strength that new highs have been reached. In fact, we observe that the seven stocks representing the 30% of the indexâAlphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Teslaâhave increased by a combined about 117% since the index’s last low in October 2022, significantly outperforming the performance of the other 493 S&P 500 businesses.
đ Understanding the dominant position of Big Tech is therefore important to understand that although a rising S&P 500 is usually a good thing, when this rise is led by only a small number of companies, growth may not be so natural. This enthusiasm in the markets is largely dictated by the scenario that investors have now about a possible rate cut, a soft or no landing of the economy, and future earnings growth. On the other hand, if the economy continues to grow as expected, there may be stocks outside these tech giants that could represent excellent opportunities.