Earlier this month, the S&P 500 closed above 5,000 for the first time ever. Interestingly, the S&P has risen in 14 of the last 15 weeks – something it has not done since 1972, according to Dow Jones Market Data. The gains have been driven by a better economy, healthy profits, and lower inflation (excluding the inflation reading this week).
Our Friend, Jeremy Siegel
According to Jeremy Siegel (one of the professors that Randy and I both studied under at Wharton School of Business), stocks are NOT expensive despite the S&P’s 23.27 price to earnings (PE) ratio. To put that PE figure into a historic perspective, from 1981 to 2022 the average PE ratio was 21.92. At a cursory glance, one could conclude that Dr. Siegel is wrong and stocks are in fact expensive.
The Magnificent 7
This is a term that has been used with great frequency over the past few months. The Magnificent 7 is referring to the 7 largest stocks in the S&P 500. This list includes Apple, Microsoft, Nvidia, Tesla, Google, Meta, and Amazon. The Magnificent 7’s total return in 2023 was 107% versus the overall S&P 500 Index return of 24%. These 7 stocks have a P/E ratio of approximately 35x according to FactSet. These stocks are MUCH more expensive than the other 493 stocks in the S&P 500 because they are expected to grow at a much quicker pace than their peers. Are these great companies? Yes. Do great companies lead to great stock performance? Not always.
The Other 493
The S&P 500 has a forward price-to-earnings (P/E) ratio of about 15.5x excluding the Magnificent Seven according to FactSet. Jeremy Siegel (and others) argue that these 493 stocks are trading at a discount when compared to historic levels.
Stock Market In The Short-Term
Given the historic run we have seen over the past few months, we expect the market to “take a breather”. This does not mean that there has to be a 20% correction in the market… it just means we do not see stocks moving higher in a short period of time.
The Price Group’s Conclusion
The Magnificent 7 are expensive – there is no denying that. Can those stocks continue to move higher? It is possible but all company growth rates slow at some point.
We think this type of investing environment requires a critical eye to know what you own and why you own it. Investing with a process continues to be very important. With that being said, we think there are still companies in the 493 that are worthy of ownership. As we have written about in the past, we continue to focus on companies that not only pay dividends but have historically increased their dividends year over year. A majority of the Magnificent 7 do not pay dividends and thus do not meet our criteria for ownership within client portfolios.
About the Author
Matt Price serves as a Partner and Managing Director for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their four children and "Fisher" the family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business for his Certified Investment Management Analyst (CIMA®) designation after receiving his undergraduate degree from the University of Tennessee - Knoxville. Over the past 12 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes everyone needs a wealth coach!
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The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.
The Standard and Poor's 500 Index is widely regarded as the best single gauge of the U.S. equities market. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. The Standard and Poor's 500 Index focuses on the large-cap segment of the market; however, since it includes a significant portion of the total value of the market, it also represents the market.
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