On Friday, the S&P500 stock index closed above 5000 points for the first time in history, and in this context, I would like to share some fresh and interesting numbers.
We reached 5000 from lows close to 4000 at the end of October last year, since then we have witnessed growth in 14 of the 15 trading weeks (by more than 22% overall).
The last time we recorded similar statistics was at the turn of 1971 and 1972. It took the index 757 days to get from 4,800 to 4,900, but only 15 calendar days to move another 100 points to 5,000.
Europe has also seen a stock rally, and the EURO STOXX50 index has finally surpassed its 2007 pre-financial crisis levels. The broad pan-European STOXX600 index has also come within striking distance of its all-time highs.
The rise in the S&P500 index is once again driven by stocks from the “Magnificent 7” basket, representing a third of the index’s market capitalization, which have risen by more than 38% since 27.10.23. Since the beginning of the year, it is 18% against 5% of the entire index.
And once again, stock prices are tracking earnings growth, as of 27.10.2023 the expected profit for the next twelve months for the “Magnificent 7” has increased by more than 16% against almost zero growth for the rest of the index. We have already discussed this phenomenon at our Investment Breakfast in October 2023.
If we put the above in the context of the fact that over the same period, the yield on the ten-year US bond has fallen from values close to 5% to values attacking 4% from above, the explanation for the growth of stock indices is obvious. In addition, after the so-called “pivot” from the December meeting of the Fed, there was a significant easing of financial conditions, which led, and will continue to lead, to good macroeconomic indicators in the US in the first quarter of this year. At the same time, however, this may lead to an increase in inflation expectations and a revision of monetary policy in the rest of the year, with an impact on interest rates and the valuation of risky assets.
Regarding the expected development in the coming weeks, it is also good to remember the rule “tops are a process, lows are a moment”, which says that the search for the top may take some time. Stock rallies of a similar magnitude to the one we are experiencing do not respect valuations, but only interest rates, more precisely real interest rates, so this parameter will be the most important factor in the near future.
In terms of valuation, the “Magnificent 7” shares will continue to have the greatest impact on the value of the index, and a detailed analysis of their valuation has been published on this platform by Aswath Damodaran. According to the professor, the prices of these shares already reflect the uniqueness of the business models of these companies that bring growth and profit. His conclusion is that those who have not owned shares so far will not be able to make up for their losses with the current purchase and points out that even the best companies sometimes bring disappointment, to which the markets overreact, and at such a moment it is good to buy.
You can find the analysis on https://lnkd.in/epWu8Qjp
Written by Leos Jirman of Emun Partners, emphasis added
Disclosure:
The goal of the blog is to provide investment ideas for further research. I/we have a beneficial position in the shares discussed above either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. The article does not represent investment advice. Please do your own research before making any investment action.
Fit Investment Ideas 