Weekly Update

The Stock Market Has Expanded Participation and Become Expensive

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Published December 4, 2020

Below are some slides from a recent presentation by Charles Schwab market analyst Liz Ann Sonders. They give a good overview of recent market action. The first slide shows how the top 5 stocks in the market drove returns through the first eight months of the year. Since August, the other 495 stocks in the S&P 500 have at least helped do the lifting.

S&P 500 big 5 minus other 495 stocks YTD performance

Driving the surge in stocks is a rebound in corporate earnings. Estimated earnings growth is expected to peak in the second quarter because of the comparisons to the depths of the lockdown when earnings plummeted. Beyond that, earnings growth is projected to be solid.

S&P 500 earnings growth

But the market surge in recent months has left stocks on the expensive end. The forward price-earnings ratio shown below suggests that stocks are about as expensive, in aggregate, as they were at the height of the 2000 dot.com boom. But the mix is different. The top stocks are not as expensive as they were then. The bulk of the market is more expensive. As those corporate earnings surge, these numbers might come down a bit. But they are high.

S&P 500 forward P/E

They got that way because investor sentiment is also very bullish. The sentiment measure below puts the current reading on the high end. Note how low the measure got back at the pandemic lockdown lows. Also note how long and high the readings were back in 2017. We could be up here for quite a while.

Bullish investor sentiment

Market Update

Stocks closed a blistering month of November by giving back a slim portion of the month’s hefty gains. News that vaccine maker Moderna (MRNA) was seeking approval for use of its vaccine sent that stock higher by +20%. It was not enough to overcome some end-of-month profit-taking, however, as the broad market indexes slipped -0.5%. Tuesday brought a new month, an inflow of new money, and a broad advance. Stocks zipped higher by +1.3%. Energy prices showed lift Wednesday and stocks followed with a +0.2% move. A sixth straight monthly increase in the services sector pushed small-cap and cyclical companies upward Thursday, while the broad market ran in place, hampered by news that Pfizer (PFE) will ship only half as many vaccine units as expected. Friday brought a strong close to the week with a +0.9% rise as a resumption of stimulus talks appeared to bolster investor enthusiasm.

Record highs for the S&P 500 (SPY) after a weekly advance of +1.70%. The Nasdaq 100 (QQQ) added +2.18% to also hit record levels. The smallcap Russell 2000 (IWM) rose +2.08% to continue its break to records; it was the index’s fifth consecutive week of gains.

Warm wishes and until next week.