Kelly Evans
This is truly one of the strangest markets in recent memory.
The Nasdaq is at all-time highs, while the Dow is coming off an eight-day losing streak for the first time since 2018. If the Dow falls again today (as it's looking right now), it will be the first nine-day losing streak since 1978.
The S&P 500 meanwhile has been flattish since its record high close two weeks ago. But it's still up a whopping 28% so far this year, and its charts seem to hint at further upside. And yet the equal-weight S&P is up half as much, just 14% this year, and looks like it's breaking down. And we're coming off 11 straight days where there have been more decliners than advancers in the S&P 500--the longest stretch since September 2001.
There's more! The market cap of U.S. companies whose enterprise value is trading at more than ten times adjusted profits, or Ebitda, according to Goldman is now at the same level it was back in frothy 2021, before the market underwent a nasty correction. But then there are mega-cap tech stocks like Google trading at just 22 times forward earnings, which is hardly expensive.
What does it all mean? Is the market "broken"? Is it in a tech or AI bubble? Of course the exuberance is high right now, especially post-election, and I won't be surprised when we have a pullback. But if I had to position with a time horizon of anything beyond a couple of years, would I rotate out of the S&P 500? No.
To me, the oddities of this market--the concentration in big tech names, the sudden liftoff in stocks like Broadcom--is exactly why I want exposure to the traditional S&P 500. Does it mean more volatility? Sure. The flipside of that is higher returns in the long run, though.
America is the envy of the world right now, for its tech outperformers in particular. The S&P 500 by itself now accounts for more than 50% of global stock market cap. I understand a lot of people want to fade this, and say it's time for a rebalancing to international stocks. But why would I want to fade cutting-edge innovation in exchange for cheaper, "dead-money" stocks?
Money Report
Broadcom is a trillion dollar stock that just put up fifty percent revenue growth year-on-year. What other global companies of that size can do that? Broadcom in the two sessions prior to today grew by $324 billion in market cap--more than Germany's biggest company, SAP, is even worth (at $310 billion). Side note: for more on how Germany missed the technology era, this podcast with Wolfgang Munchau is worth a listen.
So I like how Bespoke puts it: given the divergences between the regular S&P 500 and its equal-weight self, they're watching for an "all-or-nothing" day where either everything (including the mega caps) finally declines, or everything except the mega caps goes up.
That could tell us a lot about which way the market wants to go in the coming weeks and months. Which is great. But in the longer run, I want to stick with the market that has the best growth and innovation opportunities--even when its valuations are looking stretched.
See you at 1 p.m!
Kelly
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