Your Money
More than half of the S&P 500's return last year was driven by seven companies: Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. Often referred to as the Magnificent Seven, these companies comprise more than 37% of the S&P 500. Although the index has been more concentrated in the past, its concentration is rarely this highly valued. Currently, the S&P 500 is trading at approximately 22 times the expected earnings of its constituent companies over the next 12 months, significantly above its average since 1990 of 16 times. Even after the recent decline in tech stocks, the Magnificent Seven are trading at an average of 43 times their expected earnings for this year.
While valuation is a poor predictor of near-term returns, as evidenced by the now-famous "irrational exuberance" speech of 1996, it serves as an excellent predictor of long-term returns. At PWM, we believe future stock market returns will be muted because of today's high valuation. We are balancing the present optimism regarding the US economy and corporate earnings by finding fair valuations outside of the Magnificent Seven. This includes overlooked sectors such as financials, healthcare, and other asset classes, including private opportunities within real estate and infrastructure.
What You Should Do About the Stock Market’s Giant Problem
by Jason Zweig
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