October 28, 2023 Market Update

The U.S. stock market continued retreating for the week through Friday’s close.  The S&P 500 dropped 2.8%, the second straight weekly decline, leaving the index at its lowest level since May. 

The recent run-up in Treasury yields, by contrast, paused in the week just passed.  One reason may be linked to Friday’s news that the core PCE inflation rate, a key benchmark for Federal Reserve monetary policy, ticked down again to a 3.7% annual pace through September, the softest gain in 14 months. 

By now you have probably read about how the stock market’s gains in 2023 are almost entirely attributable to the so called “magnificent seven,” which refers to the largest seven stocks in the S&P 500: Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), Nvidia (NVDA), Tesla (TSLA), and Meta Platforms (META).

As a group those seven stocks are up an average of nearly 79% in 2023, as compared to a 4% average loss for all of the stocks included in the S&P 500.  Small cap stocks are even deeper in the red with a 5.9% loss in 2023 (iShares Russell 2000 ETF (IWM)).  Meanwhile, U.S. bonds are off a bit more than 2% year to date, according to the Vanguard Total Bond Market ETF (BND).

This high concentration in returns has meant index funds that track the S&P and the Nasdaq have crushed more diversified portfolios that have exposure to a variety of sectors of the stock and bond markets.  It also means the tech-dominated stock indexes have become very expensive.

The Magnificent Seven are trading at an average forward price-to-earnings ratio of approximately 33, compared with the S&P 500's P/E of about 18.  As a result, many market observers are wondering out loud if the stocks are expensive relative to their earnings, leaving them vulnerable to a pullback. 

One of Warren Buffett's most famous quotes: “Only when the tide goes out do you learn who has been swimming naked.”  Well, the tide may have started to recede for some of the biggest tech companies.  So far this earnings season.  Tesla, Meta Platforms, and Alphabet all finished in the red last week following the release of their third quarter earnings reports.

It's hard to say whether big tech’s incredible run is approaching its end, but history clearly suggests that when one segment of the market outperforms the rest of the market to an extreme degree, sooner or later things will revert to the norm.

That’s all for now.  Take care and invest wisely my friends.