Everything looks great in the corporate economy. Earnings on the S&P 500 are tracking up 9% from last year . . . the fastest leap into record territory since early 2022, when the Fed was still keeping interest rates at zero and the post-COVID high was lingering.
But two years ago, most of the growth was concentrated in energy stocks, which came soaring back from the pandemic straight into the sudden global embargo of Russian oil after the Ukraine invasion. The banks and consumer stocks, meanwhile, were suffering.
This time the fundamental progress is broader and more sustainable. These aren’t just happy words.
Remember, energy only accounts for 6-7% of the S&P 500 in terms of market capitalization. The banks and consumer stocks joining the party now are a much bigger slice of the market.
In other words, a similar top-line number has a much broader and better impact. And if the Fed is truly on the verge of cutting interest rates, that positive vibe will spread. That’s where the “sustainable” part comes in.
Margins are high. Revenue is increasing. There are signs that inflation has finally broken. The Goldilocks Economy is here, with everything at least briefly hitting the sweet spot.
However, the market has anticipated all the good news. The S&P 500 is trading at a 21X forward multiple, which should terrify those of you who remember the days when a 16-17X multiple felt more than a little bubbly.
In other words, the Goldilocks on Wall Street has already eaten all the porridge. What’s left behind is historically overpriced. Not a bargain. At best, a hold while the earnings that hold up the “E” side of the P/E calculations catch up.
That’s also plotted into Wall Street’s targets. The analysts think the market might float another 7% higher in the coming year . . . good but not great. If all the math plays out, overheated multiples will contract a little.
And in the meantime, if the porridge looks played out, you can always avoid the overheated sectors. That means skipping technology and big consumer stocks like Amazon and Tesla. Do you have the guts to do that?
Those stocks are always overheated. But they’ve led the market higher over the years. They’re meant to be served “hot.”
On the other side of the market, energy and the banks are now trading cheaper than “boring” utilities and real estate stocks. None of these sectors are growing at any impressive rate.
They’re meant to be served cold. So ask yourself what kind of experience you want from the market and which bowl you need to eat from. Value Authority is all about good stocks in cooler sectors.
They’re not growing fast and they’re trading at depressed levels. We’re earning completely passive income of 6.8% a year for the foreseeable future there . . . even if the stocks go nowhere. That’s better than bonds or CDs and a lot better than the market as a whole.
GameChangers, on the other hand, is as hot as it gets. The Buy List has soared 79% YTD. Two of our stocks have beaten NVDA. The multiples might not be reasonable but the performance speaks for itself.
The moral: hot or cold, you can’t make money unless you’re in the market. Just pick your bowl and dive in.