Evening Brief – 02.14.24

20.3x Earnings

Most of the major equity indices have added to their strong 2023 gains this year, with the DJIA up 2.6%, S&P 500 up 5.4%, and NASDAQ up 6.5%. The NASDAQ 100 has led all averages, up more than 9%, while the Russell 2000 has lagged, down 0.1% year to date.

According to the latest FactSet Earnings Insight, the market is pricey in terms of historical P/E ratios. The S&P presently trades at 20.3 times earnings, which is much higher than both the 5- and 10-year norms.

This hefty P/E ratio, which suggests investors are willing to pay a premium for future earnings growth, can be attributed to the enthusiasm around artificial intelligence (AI) and the exceptional performance of the “Magnificent 7” stocks, along with other select mega-cap tech stocks.

Morningstar.com revealed that the overall market capitalization of the U.S. stock market was $54.6 trillion, up from $31.8 trillion at the end of 2019, a 41.2% increase, reflecting the formidable NASDAQ 100, where the top 10 holdings account for 45.2% of total assets.

For the S&P 500 to continue its strong upward momentum, it appears that we need to read more of the same headlines, such as falling inflation, strong employment figures, and projections of interest rate cuts, which are all possible.

At the same time, investors appear to be ignoring rising debt levels. According to the U.S. Treasury, $776 billion in debt was issued in the fourth quarter of 2023, the largest amount ever borrowed by the government. Treasury also revealed plans to borrow $776 billion this quarter and $816 billion next quarter. All this has interest rates remain elevated.

Still, the market is off to a good start for 2024, and there is over $8.8 trillion in money on the sidelines, earning over 5% in an economy that looks to have skirted a recession. If you buy the indexes now, you may be just chasing momentum. But it appears any pullbacks still present buying opportunities.