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Weekly Market Update October 20, 2023 (Video)

Weekly Market Update October 20, 2023 (Video)

October 21, 2023


Dow Jones Industrial 33,127 -1.6%, S&P 500 4,224 -2.4%

Nasdaq Composite 12,984 -3.2%, US Ten Year 4.9%, Crude Oil $88.28 

This week was another painful one for equity investors despite overall earnings results for the 3rd quarter thus far coming in much better than expected.  According to data from Factset: so far for the 3rd quarter, of the 20% of S&P 500 companies reporting, 73% have reported better than expected earnings, and 66% have reported better than expected revenues.  Also, for the 3rd quarter, the earnings growth rate so far for the S&P 500 is +1.8%.  If this rate holds, it will mark the 11th consecutive quarter of revenue growth for the S&P.  The forward 12-month P/E ratio for the S&P is 18.1x (vs the 5-year average of 18.7x and the 10-year average of 17.5x).



However, S&P multiples these days should be taken with a large grain of salt.  Seven stocks in the S&P 500 currently account for nearly a third of the S&P 500’s total market capitalization.  Said another way, these “Magnificent Seven stocks” (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla) have accounted for over 70% of the S&P 500’s year-to-date returns (data from VanEck, October 9, 2023).  Therefore, it’s essential to examine valuations including and excluding these seven names.  The Jackson Pollock-like chart below illustrates how these names impact the S&P 500.


The aggregate forward P/E ratio for the Magnificent Seven Is 28.6x.  The forward P/E ratio of the S&P 500, excluding these seven names, is 15.9x.  So, the 493 “other” S&P 500 names are trading well below the historical 5-year average multiple of 18.7x and the 10-year average of 17.5x.  This is despite the fact that earnings, so far, have come in much better than expected.


This is not a bearish call on the Magnificent Seven.  We are positive on six of these seven names, (excluding META) and are bullish on their future growth prospects.  These seven companies are direct beneficiaries of technology (think AI) and/or have a unique positioning in their respective business lines that warrants an elevated multiple.  However, it is crucial to maintain a balanced portfolio outside of these names, as eventually, the AI revolution will make its way to the rest of the 493 names in the S&P 500.  Our goal is also to be positioned in the “best of the rest,” which will ultimately increase prospects for future portfolio growth and will capture what we think is the inevitable closing of this multiple gap.