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Good company versus good investment

Mar 23, 2023

There is in our humble opinion little to comment on the Fed’s action and comments yesterday except their need to satisfy 2 opposing camps: on the one hand the comments and a 25 bps hike need to be dovish enough to reassure the banking system and, on the other hand, hawkish enough to reassure markets that the central bank does whatever it takes to fight inflation. We have little to add except that the painful normalization phase after years of ultra-lax monetary policy with almost zero interest rates is moving ahead. We therefore point to another potential problem: the 2 largest stocks in the S&P 500 now represent 13% of the index, a concentration unseen since the 70s. Not only does this create headaches for active investors who do not own Microsoft and Apple, but we also think these long duration technology stocks are particularly vulnerable in a rising interest rate environment at 27.4 respectively 25.5 times 12 months forward Price/Earnings ratio. There is a difference between a good company and a good investment.

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