Week in Review: The U.S. equity market reaches an elevated valuation level, but options exist

Week In Review – Friday, June 23th, 2023

The U.S. equity market reaches an elevated valuation level, but options exist

2023 has seen a strong rally in the U.S. equity markets. However, the increase in stock prices has been driven by valuation metric expansion rather than by growth in underlying fundamentals. The aggregate S&P index is now trading on almost all valuation absolute metrics in the top decile of the historical valuation range and only slightly lower on a relative valuation basis.

However, the market rally this year has been relatively narrow with seven mega-cap stocks driving almost all the positive return. Looking at the current P/E ratio of the seven mega-cap stocks, the ratio at 30X is now trading at a 25% premium to their collective history. Meanwhile, the remainder of the S&P 500 stocks are trading at 17X, which is in line with their 10-year average.

The juxtaposition of the performance and valuation of the mega-caps versus the rest of the S&P 500 has created a glass-half-empty or half-full dilemma. From the half-full perspective, an opportunity could be set up for a catch-up trade for the components of the broader market. This took place in June with an improved stock performance from a broader base of stocks. From the half-empty perspective, the seven mega-caps may be set for a pause or reversal in performance given their high relative valuation. The mega-cap tech seven make up 28% of the S&P index and any stall or pull-back in their stock performance may make upward progress in the S&P 500 index difficult.

Valuation, however, is just one component driving the S&P 500 index. Economic and corporate earnings growth and inflation will ultimately determine the trajectory of the markets. Current valuation metric expansion suggests optimism towards growth in fundamentals and falling inflation.

At Pallas, we remain confident that well-run public companies will ultimately see positive fundamental growth over time and through full business cycles. Current aggregate equity valuations do give us cause and reason to pursue a diversified investment mix drawing across opportunities in the US equity market, and international markets as well as sourcing opportunities in fixed-income and private market alternatives.

Important Disclosure:

The preceding information is for general educational purposes only. It is not intended to be investment advice, and is not specific to any individual’s personal situation. Any decision about investing should be undertaken only after careful consideration of the investment’s risks, costs, liquidity or lack thereof, and the investor’s timeframe.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product referred to directly or indirectly in this newsletter will be profitable, or equal any corresponding indicated historical performance level(s).

Investment Advice offered through Pallas Capital Advisors, LLC, a registered investment advisor.

CRN23_34

Mark A. Bogar, CFA^®, CAIA^®
Chief Investment Officer
Pallas Capital Advisors

Stephen Kylander
Senior Portfolio Manager
Pallas Capital Advisors

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The information contained herein is for informational purposes only, is not personalized investment advice and should not be construed as a recommendation to purchase or sell any particular security, sector or strategy to any individual person or entity. The decision to review or consider the purchase or sale of any security, sector or strategy mentioned should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional. Past performance should not be considered as an indicator of future results.

Investment Advice offered through Pallas Capital Advisors LLC, a registered investment advisor.

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The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

Pallas Capital ADVISORS is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Pallas Capital Advisors and its representatives are properly licensed or exempt from licensure. This website is solely for information purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Pallas Capital Advisors unless a client service agreement is in place.

Advisory services are only offered to clients or prospective clients where Pallas Capital Advisors and its representatives are properly licensed or exempt from licensure. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Pallas Capital Advisors unless a client service agreement is in place.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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