Two the Point — Market Valuations Beyond the Mega-Caps

The current market landscape presents high valuations primarily driven by the Mega-Cap-8, but excluding these, the broader market shows more reasonable valuations, supported by historical context and recent economic indicators suggesting a normalized labor market.

Key Insights:

• Valuations:
  • The S&P 500 forward P/E ratio stands at 20.6, influenced by the Mega-Cap-8 (Magnificent-7 plus Netflix) with a forward P/E of 30.0.
  • Excluding the Mega-Cap-8, the forward P/E for the remaining S&P 492 companies is a more moderate 18.5.
  • Mid-Caps (S&P 400) and Small-Caps (S&P 600) offer more attractive valuations, with forward P/E ratios of 15.7 and 15.4, respectively.
• Historical Context:
  • The average P/E ratio of the S&P 500 since 1929 is 15.8, but the index has traded within half a point of this average on less than 8% of all trading days, highlighting the rarity of this benchmark.
• Market Rotation:
  • Since July 11, Mid-Caps and Small-Caps have outperformed Large-Caps following June’s lower-than-expected CPI reading, bolstering expectations for a September Fed rate cut.
• Labor Market Indicators:
  • Indicators suggest a normalizing labor market, with a decline in job availability perception and cooling wage growth, aligning with the Fed’s efforts to control inflation.
• Outlook:
  • We anticipate compensation growth to moderate further in the second half of the year, providing the Fed with clearer data to make informed decisions regarding rate adjustments.