A client said something to me the other day that got me thinking. Something to the effect of “this market is too good and it makes me nervous”.
I mean the market as represented by the S&P is positive over 26% so far this year. It got me thinking about how I’m sure there are millions of investors with this same feeling right now and it got me wondering how this market might compare to a market in history where the client’s apprehension would’ve been correct – a time where the “market was too good”. I chose to look back at our current market against the dot com bubble market (2,000) and I did this for a couple main reasons. The first being recency and the second reason being how both markets are similarly tech-driven stock market rallies.
I’m sure it’s clear by now that I like to use visuals to illustrate a point so those who also like visuals will NOT be disappointed 😊.
In this first illustration, you can see how the largest tech companies of our current stock market compared to the largest tech companies of the dot com era. I want to emphasize two points that I found interesting
1) The companies of today are much more profitable (see far right column) than the companies of the dot com era.
2) The valuation of these companies are less today than they were back then (see 24-month FWD P/E column) which means stock prices are more justifiable now than they were then.
Next, I took a look at the whole S&P 500, rather than just the tech sector, to see how current valuations compared. As you can a P/E ratio of 30.66 is quite a bit less today than it was back in 2000-2001 when it was in the 44-47 range. This signifies that the broader stock market is cheaper now relative to corporate earnings than it was in the early 2000s and several other points for that matter.
And then finally I looked at the latest earnings release showing 3rd quarter earnings performance of the S&P 500 companies. If you want a refresher on this topic, see the piece I wrote in June 2024 regarding Corporate Earnings. The reality is companies are making money right now and what might not be fun as a consumer can be fun as an investor as we participate in the stock market growth of the companies that are making money. If you peruse the below data, you’d see that 76% of the companies EXCEEDED the quarterly earnings estimates they made last quarter and 61% EXCEEDED their revenue estimates. In short, the majority of companies even made more money than they estimated they would.
It's certainly natural to be cautious when markets feel high BUT I always, always, always want to keep my eye on what it means to be an investor. Owning stock is buying ownership in a business. We can look inside the financials of these businesses and in this country, we have a pretty darn transparent system that allows us to trust the data that is released on a quarterly basis.
Until next time.
Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All investing involves risk, including possible loss of principal.
