It’s no secret that the S&P500 has been on a tear through 2023, shrugging off higher rates and geopolitical concerns and posting a 15.5% return at yesterday’s market close.
That bull market has been disproportionately powered by seven technology companies (Apple, Microsoft, Amazon, Nvidia, Alphabet, Tesla, and Meta), which were up over 50% from January 1st through late September and now comprise over a quarter of the S&P.
Many of those companies are richly valued, including Nvidia’s eye-catching 187x price-to-earnings ratio. When BlackRock examined the S&P500’s aggregate P/E with and without the seven giants as of June 30 this year, it swung from 20.4x to 17.5x, much closer to long-term averages.
While it’s certainly possible that those outperforming names will continue their hot streak, studies suggest that P/E ratios for individual stocks tend to revert to the mean over time, so large run-ups in P/E ratios are often followed by pullbacks. That would mean putting up the same type of performance we’ve seen through 2023 thus far, many of these names would need to more than double their earnings in a short span.
What does this mean for investors?
The run-up has decreased the diversification investors receive from many index funds because those high multiple mega-caps now comprise a larger portion of the index, forcing index providers to change their weightings to ensure some diversification.
Now is an opportune time for investors to consider greater diversification than indices currently provide by allocating a portion of their portfolios to the private markets, where valuations have become more attractive rather than less over the course of 2023.
Finally, before we close, I want to acknowledge, on behalf of everyone here at Gridline, the unfolding tragedy in and around Israel at this time. Our hearts are heavy with concern, and we hope for the safety of our friends and colleagues in the region.
-Logan Henderson, Founder and CEO
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Worth a Read
The Potential of GP Stakes Investing in the Private Markets
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Private Equity’s Massive Market
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