In the second quarter of 2024, the Global Markets, as defined by the MSCI ALL Country World Index, appreciated 3%* in U.S. dollar terms. Year-to-date, this same index, posted a gain of 11%*.

In the U.S., the S&P 500 Index is up 15%* this year with most of the gains concentrated in the Information Technology and Communication sectors, appreciating 19%* and 18%* respectively. The next best performing sector, Energy, has only gained 10%* year-to-date, while the lagging sector, Consumer Discretionary, is up 2%*.

About 60% of the S&P 500’s total return for the year has been driven by five companies whose shares have some of the heaviest weighting in the index: Nvidia, Microsoft, Meta Platforms, Alphabet and Amazon. These large price gains have created stretched valuations. For the five, Current Price to Earnings (PE) ratios are between 28 and 71 times, Forward Price to Earnings (FPE) ratios are between 24 and 53 times, and Price to Sales (P/S) ratios are 7 to 39 times. The S&P 500 is currently trading above 21 times FPE,  and given that bond interest rates are between 4.3% and 5.2%, some would argue that the fair value of the S&P 500 should be approximately 16 times, which would put the market at more than 30% overvalued. Interestingly, though the S&P 500 and NASDAQ traded at or close to all-time highs during the last two weeks of June due to the continuing upward trend in the relatively small number of mega-cap stocks mentioned above, the reality is, the number of stocks trading at 52 week lows was well above the numbers making 52 week highs, and the majority of US-traded stocks were trending downward.

Today, with an overvalued U.S. market, elections on the horizon, geopolitical events continuing to brew, and investors on Fed, interest rates, and economic watch; what is an investor to do?

First of all, don’t chase the most recent, overvalued, overhyped stocks, but also don’t be frozen into inactivity due to potential short-term events. Continue to move forward, but with caution. There are still compelling opportunities out there, though fewer today than normal. Investors may find value in market laggards such as Consumer Staples, Financial Services, Healthcare and Emerging Markets.

What will I be doing in the 3^rd Quarter?

I’ll be focusing on companies with the mindset of a company owner. High levels of free cash flow and strong balance sheets are a priority. Both will be needed if a company is to prosper in a potentially difficult economic environment. The free cash flow can also aid in paying out dividends that I’m now finding in the 4 to 7% range. Also on my company check list will be a proven history of success and strong operating metrics. And lastly, being cautious, I’ll only buy when I believe the price paid for the security is low relative to the companies intrinsic value. Since…

“Price is what you pay. Value is what you get” – Warren Buffett.

Ted Velikonja, CIM®, FCSI

Velikonja Financial 

We can be reached at 

Email: connor.velikonja@cibc.com

Phone: 519 660-3759