Time to be selective

Today’s graph from MarketDesk shows the median next-12-month P/E ratios across the S&P 500, sorted by market-cap buckets. The headline index trades around 22x earnings, but the Top 10 names are much richer at 27.4x 12-month forward earnings. As you move down the index, valuations become less stretched, with the smallest 200 stocks in the S&P 500 trading in the mid- to high-teens.

At ECP, while we recognize that there is a lot of growth currently in the mega-tech companies – and that they therefore also deserve higher valuation multiples – we remain mindful of concentration risk. Beneath the surface, a large part of the US market still offers more reasonable entry points. For investors who do not want to pick individual stocks, an equal-weighted version of the S&P 500 can therefore make sense as part of a diversified portfolio. In our strategies, we currently focus our research away from the crowded mega-cap space and towards quality companies further down the index, where active stock picking can still add value.