After a strong November for the overall equity market as risk-free Treasury Rates retreated, December has continued that momentum. The driving force is the anticipation of rate cuts heading into the coming year, which remains the key focus. This has allowed the pressure to come off of more value-oriented sectors of the market and ultimately see a widening out in the participation of the upside. This can be reflected in the
I think it’s also interesting to note that we previously had a longer-term perspective of going back to mostly when equities began selling off. We’ll be able to see why the
Another interesting thing to note is that the RSP has produced a nearly identical result during this period in terms of its price percentage change. If we include total return results, RSP is a bit better due to the higher yield it is able to produce. However, in the grand scheme of things, RSP (expense ratio 0.20%) is at about a 1.66% yield, and
To close out December, we could still see a Santa Claus rally that often occurs, and that possibly continues to lift equities. The next CPI report isn’t due until January, so that’s one report we don’t have to worry about that could disrupt the momentum. The overall strength of the move higher in such a short period of time on its own could be the reason we don’t see a Santa Claus rally, though. Such a strong move in such a short period of time often starts sending off short-term oversold technicals that could cause things to cool. For example, the RSI is a popular and basic measurement of being overbought or oversold conditions. I readily admit that I’m not a chartist or technical investor because I’m a longer-term dividend-oriented investor. That said, RSI on
Today, I wanted to take a look at the more “expensive” names. That would include
All that said, equities can go a long time, making new highs or only having mild dips before a more substantial, market-wide disruption occurs that can often take these high P/E stocks down with it. In the case of MSFT, it is a substantial part of the “market” on its own. Part of the Mag 7 names, MSFT is the second-largest position in SPY at a weighting of 6.53%. Therefore, MSFT is going to have a meaningful sway on which direction the market is moving. It’s also important to note that equities such as MSFT and MA have attractive growth trajectories. Thus, what might be expensive today won’t be expensive when we look out a couple of years down the road. That is, even if their share prices don’t move over the next two or three years, P/E can come down on its own. This is why an investor who has a longer-term time horizon of several years or even decades probably doesn’t need to fret too much about their entry price. In looking at MSFT, we can see the declining forward P/E based on the earnings forecasts provided by analysts. Over the coming five years, analysts estimate that MSFT will grow its earnings by around 14.5%. MSFT has quite a regular history of beating analyst expectations in 15 out of the last 16 quarters. That has the possibility of making it so these could actually be considered on the lower end of what earnings could be anyway.
The forward P/E might be over 33x now, but it only takes a few years to get it below 25x, should they meet these forecasts. MA’s earnings estimates show that it is expected to grow a touch faster, at an average of ~16.5% in the next four years. I’m using four years here instead of five, so it isn’t an exact comparison, but that’s because MA only has one analyst with a target provided in 2027.
Of course, this is where growth comes in and the outlook for growth. It is why I noted that the market looks more efficient here, with MA being a bit more richly valued than MSFT, given their earnings forecast. If more growth is expected, that means a company’s shares can trade at a richer P/E. This is where the price/earnings-to-growth ratio (“PEG”) ratio can come in. This is another helpful fundamental valuation metric that can help provide a basis for valuing an investment. In this case, MA looks like…