Will the Stock Market Keep Going Up? What to Know as the S&P 500 Hits New Highs.
Will the Stock Market Keep Going Up? What to Know as the S&P 500 Hits New Highs. (msn.com)
With the S&P 500 trading close to all-time highs and selling at historically expensive valuation multiples, what should investors be doing? Barron’s Nicholas Jasinski explores this topic in this week’s cover story.
Summary
The S&P 500 has advanced ~130% since the March 2020 pandemic lows and now trades at a historically pricey 21x (fwd.) earnings. As of early March, the S&P 500 has advanced in 16 of the prior 18 weeks (a feat not accomplished in over 53 years). There are plenty of reasons why the stock market could temporarily decline, including investors believing interest rates will not be lowered until later than is currently anticipated, or noise surrounding the 2024 presidential election. If a correction does occur (there is no formal definition of a stock market correction, but most people consider a correction to have occurred when an index declines by more than 10% (but less than 20%) from a previous high). While most investors dread stock market corrections, they are completely normal as there has been approximately one correction per year since 1929.
A correction could be a good buying opportunity. Going forward, stock returns should be driven by a stronger economy (as opposed to rate cuts) and will make future advances more democratic (and not simply just driven by the magnificent seven which accounted for more than 2/3rds of the S&P 500’s 2023 advance).
By almost any metric the U.S. economy is in good shape, GDP grew by 2.5% in 2023, and is forecasted to grow another 2.1% this year (although in our opinion, economic forecasts should be taken with a healthy degree of skepticism; case in point: many were forecasting a recession that never materialized for 2023).
Jasinski points out that in terms of both earnings’ growth and stock market performance, the Magnificent Seven were the clear leaders in 2023. Interestingly, he shows that by Q4 2024 Wall Street analysts are forecasting the same earnings growth rate from the Magnificent Seven as from the S&P 493. He argues given the valuation mismatch between the Magnificent Seven and the rest of the market, now would be a good time to place a wager on the other 493 stocks.
Boyar’s Take
We agree that the best opportunities going forward are probably not in the Magnificent Seven but are also keenly aware that stocks can stay elevated in price for much longer than one would ever expect. The Magnificent Seven consists of some of the best and most innovative companies in the world, and we would not want to bet against most of them.
We believe going forward there will be a broadening of the stock market rally and one of the leaders will be small/mid capitalization stocks, which have not participated nearly as much as larger capitalization stocks. The Russell 2000 (an index of smaller company stocks) is still ~15% below its 2021 high and many companies within the index are trading at a significant discount to what we believe their intrinsic value is. This is the area that investors should be looking at going forward.
Some Ideas for You:
All the companies featured in Boyar’s Opportunity Reports have previously been featured in our institutional research service, Asset Analysis Focus (AAF). Below are excerpts from November’s issue of AAF to give you some ideas and some in-depth analysis to start your own research.
Have a great Sunday!
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