“Big five” stocks recently hit an extreme of weight within the S&P 500 relative to the market peak in 2000 but their valuations are more reasonable today. What’s more, rotation could give way to broader-based selling if economic data fails to support recent leadership by more classically-cyclical sectors, according to Liz Ann Sonders from Charles Schwab.
More: S&P 500 Index needs further fiscal support to avoid a correction
Key quotes
“Valuations are as stretched as they were in 2000; however, less so in the case of the largest stocks. Although the S&P 500’s forward P/E ratio recently hit heights not seen since 1998-2000; the forward P/E of the largest five stocks today is more “reasonable” at 33 relative to their average multiple of 60 in 2000”
“The equity risk premium (ERP) is quite elevated relative to where it was at the market’s peak in 2000. Notwithstanding the elevated ERP and strong fundamentals for the big five, traditional valuation metrics are stretched enough that we will need a meaningful earnings growth rebound. The rotation that’s been underway this month may be part of the process of easing some of this valuation excess. However, the move toward more traditional cyclical leadership – Materials and Industrials – likely also will need support from an improving economic backdrop. Absent the latter, a simple rotation could give way to more broad-based selling of equities than what’s occurred over the past few weeks.”
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