Market Commentary
Can the Market Thread the Needle?
Overview- After a sharp post-election rally, the broad equity market pulled back towards the end of the year and finished mixed for the 4Q. The Cap Weighted S&P 500 was up 2.5%, while the Equal Weight S&P declined -1.9%. Mid and Small cap were negative by -1% to -2%, and international was down over -7% as the rest of the world was mired in concerns over stalling economic growth. For the second year in a row the top cap-weighted 15-20 names (primarily technology) in the S&P 500 Index were responsible for about 70% of the Index return - 14.5% of the 21% price gain, while the other 480 names returned about 7-8% (Exhibit 1). This is concerning - while the promise of AI seems to be a durable trend, when the concentration in the market becomes as extreme as it is now, the market tends to struggle. (Exhibit 2). Equally worrisome, valuations can only be characterized as full, if not expensive. As we have said numerous times in the past, valuations mean almost nothing in the short term but when P/E ratios are this elevated, forward long-term returns are rarely stellar (Exhibit 3). Finally, we are seeing signs of excessive hubris from investors (Exhibit 4). All these factors together suggest a pause in the bull market may be upon us. While the Mag 7 returns have been spectacular, historically, it has been a sign of concern for the market, rather than an expectation for continued dramatic gains. While equity [...]