Fundamentals… Expensive

At first glance, the market appears to be expensive.  After all, based on street consensus, the S&P is currently trading at 21 times projected 2024 earnings.  This is clearly higher than the 5- and 10-year forward price-to-earnings averages of 18.9 and 17.6, respectively, per FactSet.

However… Earnings are Expected to Grow Significantly 

Over a two-year period, the combined earnings increase for the S&P 500 is expected to be 25%.  In fact, the current bottom-up earnings estimate for 2025 stands at $276.70.  This suggests 2025 earnings will improve by over 13% over the 2024 projection, per FactSet.  This is in addition to 11% earnings increase forecasted this year over 2023.

Different Growth Rates and Multiples

It is also important to recognize the makeup of earnings along with the multiple investors are willing to pay for those earnings, within the S&P.  The narrowness of the market rally has been concentrated in mega-cap growth stocks.  That suggests that some holdings are trading at high multiples whereas many components are trading at more modest levels.  Therefore, the 21 multiple, while accurate, might not convey the true measure of the overall market value, especially when viewed between the limited numbers of high growers and virtually all other components within the S&P.

Potential Impact of Artificial Intelligence (AI)

Furthermore, we are likely at the genesis of a major technological transition.  AI holds promise to improve efficiencies, productivity, and, over time, likely even earnings. 

While it is true that fundamentals, specifically earnings, ultimately drive the market, it is interesting to understand the past to provide a glimpse into the possibilities of the future.

Interesting Facts:

• February marked the fourth consecutive positive month for the S&P 500.  Historically, there is an 84% probability the market will be positive both 6 and 12 months later.  In fact, according to Bespoke, the average return six months following four consecutive positive months is 6.4%, and 12% after twelve months.
• Next week, the Federal Open Market Committee (FOMC) of the Federal Reserve is scheduled to meet and release its Summary of Economic Projections.  Of the many interesting graphs and charts, the likely most anticipated chart is that of the Dot Plots whereby Fed officials individually predict where rates will be in the future.  It will be interesting to see if the members who set short-term interest rate policy hold with their December outlook of rate cuts, or if changes occur to the Dot Plots.
• The mean average intra-year pullback for the S&P 500 is nearly 15%.  So, pullbacks occur.  But, if one can tolerate the volatility, the longer-term outlook remains encouraging.
• Geopolitical events are concerning.  Diligence and awareness are of importance. Black swan events sometimes materialize.  This is why asset allocation and diversification are an integral part in portfolio design.
• Although the market rally remains narrowly focused, there has been broadening month-to-date, which is positive.  A broader based rally is typically viewed to be healthier.  

Summary

Although the market currently looks a bit expensive, corporate earnings are expected to continue to improve.  AI will likely impact the economy and earnings in a meaningful way in the coming years.

Lastly, due to typical volatility, along with heightened geopolitical risks, if one needs additional liquidity, this is likely a good time to evaluate the possibilities.  If cash is not needed in the near-term, we believe long-term equity investors will be rewarded over time.