12 Feb THE OVERALL MARKET IS NOT AS OVERVALUED AS THE INDICIES SUGGEST
It appears more bulge bracket firms are publicly recognizing the massive valuation differences between the mega sized tech companies that dominate the indices and the rest of the market. JP Morgan stated yesterday 70% of the S & P 500 is trading approximately 55% below the current PE multiple of 32x earnings, a PE ratio that was only exceeded during the dot.com mania of 21 years ago.
Against this backdrop, 70% of the S & P 500 would hypothetically be trading at a more realistic 14 multiple, relatively close to the “historical average” of 15.
This data is consistent with last week’s CNBC report stating that if the five largest companies are eliminated from the S & P 500, the PE ratio would fall to 20.1x.
In late December, the asset management firm Doubleline LLC wrote if the largest 25 S & P 500 companies were removed, the PE would be a more rational 12.2x.
Continuing with this theme Goldman wrote in December if the five largest S & P 500 companies fell in aggregate of 10%, S & P 500 members 401-500 would have to rally in aggregate of 90% for the index to remain unchanged.
Many times, I have referenced First Trust’s view that mega sized tech firms and retailers front loaded approximately 5-6 years of revenue growth in about 10 months because of the lockdowns. The issue at hand is the markets are extrapolating current growth rates into infinity.
I reiterate my long-held view that I believe the next 5-6 years will be analogous to 2000-2006, a period when the averages fell and then were flat but the typical company vastly outperformed. In many regards, the similarities to today are uncanny.
Commenting on yesterday’s market activity, markets were again relatively quiet. In the background, there is a debate over whether more stimulus, the vaccine distribution and supply chains disruptions will over heat the economy. Equities were essentially unchanged. Treasuries declined nominally as did crude and the dollar.
Last night the foreign markets were mixed. London was up 0.11%, Paris up 0.10% and Frankfurt down 0.46%. China and the Hangs Seng were closed for a holiday and Japan was down 0.14%.
The Dow should open flat. The 10-year is unchanged at a 1.17% yield.