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 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.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.