Everybody loves Charts!
Every so often, I’ll check in to show items floating around Wall Street circles and blogs.
Longer term trends in the markets and economy.
Extra details on what seems underappreciated or overhyped.
Link to some great explainers on the concepts.
**Everything as of 02/15/2023
As SPY and QQQ crash up to all time highs, analyst and commentator focus has become whether equities are moving into expensive bubble territory, are still fairly valued or, despite the strong rally since last October, equities still have room to run higher as 2024 progresses.
Like everything in life, it depends on your perspective. Let’s dig in a bit.
Stocks are Cheap
Honestly, on an absolute basis, it’s tough to find a sound argument that broad stock indices are cheap at the moment. This is partially due to the rally we’ve seen already but also because the underlying components of the indices have diverged SO MUCH from each other in terms of valuation.
Many analysts are consistently now managing the Magnificent 7 (MSFT, AMZN, NVDA, META, TSLA, GOOGL, AAPL) as their own category and the other 493 companies as their own category because of just how disassociated they have become from each other.
The best argument I’ve heard for a cheap equity buy is actually a basket spread trade. Buying a basket of the 493 other stocks & selling the Magnificent 7 then letting them duke it out. The aim is a reversion to a more reasonably balanced ratio between the groups but the risk is primarily these Magnificent 7 continue to dominate and bully the rest of the market.
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Stocks are at Fair Value
The argument for stocks being fairly valued is much more interesting and debatable. First, when valuing with P/E ratios, we can see current values for the S&P500 are only 1 Standard deviation above the long run average. Nothing too extreme.
Furthermore, as we saw earlier, when we tease out the biggest 7 tech companies, the remaining index components comes in at a reasonable 18x.
Digging into the Magnificent 7, NVDA - the King above all right now - actually has sound reasoning behind its ascent. We can see that while the stock has exploded higher, the earnings for NVDA has exploded as well. This suggests the rapid ascent is based on real gains and not speculation or sentiment. As long as NVDA keeps living up to their forecasts, the market cap and trajectory are within reason.
Stocks are Expensive
Unlike finding a reason for stocks being cheap, Chicken Littles abound with chart crimes suggesting we’re coming up on an imminent crash. Adjust those chart axis scales and starting points enough and you can make anything look like anything.
Below are two of my favorite offenders. See if you can guess why reports of the market’s death is greatly exaggerated.
Overall, it seems almost nothing is cheap at the moment but the “S&P493” is relatively cheaper than the remaining “Magnificent 7”. That said, just because they are expensive doesn’t mean they won’t continue to be expensive for the foreseeable future.
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Thoughts? Questions? Comments?
Reach out! Maybe I’ll do a full post on the topic or as a Q&A
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