Chart of the Week
Although it has risen less than the European market since the start of the year, the US market was still up 9.5% YTD to the 19th of May. Many studies attribute the S&P’s rise to a small number of stocks, particularly in the technology sector. This is indeed the case. A breakdown of the performance of the S&P 500 shows that the rise can be explained solely by the rally in technology stocks.
For both tech stocks (here the S&P 500 Technology, to which are added Amazon, Meta and Tesla) and the rest of the market, forward-looking earnings have been virtually stable since the start of the year. The rise in the price/earnings ratios of tech stocks therefore accounts for almost all of the increase. The enthusiasm surrounding artificial intelligence, following the launch of Chat-GPT at the end of November 2022, led to a sharp rise in the multiples of tech stocks.
While these stocks had corrected their post-Covid valuation excesses by returning to a P/E of 20x forward earnings at the end of last year, they are now trading at 25x forward earnings per share, halfway to the 30x post-Covid highs. Exuberance? Only time will tell. But if we exclude these stocks, the US market has not moved much since the start of the year, and implies a P/E in line with historical standards on very high earnings. A recession could, however, lead to a sharp fall in these earnings.
The opinion expressed above is dated May 26, 2023 and is subject to change.
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