5,000 S&P! How Did We Get Here and What's Next?

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Market News and Short-Term Predictions

It's crazy to think a year ago people were excited we were crossing 4000 again on the S&P 500, but now we approach a new all-time high it seems like every other day, and closing in on 5000! Let's take a moment to cherish these sweet sweet gains and look at the breakdown of how we've gotten here.

You probably know the answer. It's the magnificent 7 that is carrying the markets. So if you have larger exposure to those names, you have been crushing it this past year. Especially NVDA, that beast of a stock seems unstoppable.

Here are some fun facts.

If we look at S&P 500 gains with and without equal weighting, the one with the skew towards mega caps is up 27% since Dec-22 and equal weighting is only 13%.

The top 10 mega-cap companies make up 35% of the index. So that outperformance makes sense when we think about how well mega-cap tech has performed.

Now I'm not trying to shit on the mag 7 or say they are extremely overvalued, I'm just stating they have been the ones doing the heavy lifting. Even if we look at the growth expectations of Mag 7 vs. the rest of the market, they are sporting 14% growth in revenue vs. sluggish growth of 2% in Q4-23.

So the question you probably have is with the markets hitting all-time highs do I think we are overvalued? No, the forward P/E on the S&P 500 is close to 20. While that's not cheap I don't think it is at bubble levels. Are we due for a short-term pullback? Absolutely with RSI on the weekly level above 70, we could use a breather. But any pullback (3-5%) I believe will be bought up quickly.

The biggest risk I see is that since the breadth of the market outperformance is concentrated in the mega-cap stocks, if those start to show any signs of weakness they can take down the market just like they brought it up. 

I do think we have bubbles forming in AI/Chips specifically (not all stocks in the industry), but not in the general market. It reminds me of 2020/2021 with the hype and bubbles around EVs and renewable energy.

Lessons to Be Learned

I recently posted on X/Threads/Instagram a thread around investing in stocks at all-time highs is better than investing in stocks at all-time highs. 

Some people got stuck on the fact that I said to "buy high" pointing out examples like GME or Tesla. Of course, buying at the top of a bubble or buying into pump and dumps is a terrible strategy haha

I wanted to give further context to why buying a great stock at a higher price is better than buying a crap stock at a lower price. We can never forget "valuation matters", which should always be forefront when buying a stock.

Here is a real example of buying a stock at its recent highs. Take TSM who reported earnings a few weeks back.

They beat both EPS/Revenue and raised FY '24 guidance. They also traded at a valuation that I considered reasonable. You have a stock at a 20 P/E that is expected to grow net income at a pace of 20%. You also have to factor in they create chips for companies like NVDA and AMD and they are running into historic demand. That demand should flow through to TSM as well. 

So even though the stock is at a 52-week high, that doesn't mean you should not buy it just because it happens to be hitting 52-week highs! Its growing revenues. valuation is good, and the industry will have a high demand for decades to come with AI and advanced robotics.

On the flip side, if your criteria for finding stocks is to hunt for stocks that are at 52-week lows, you are looking at stocks that have not been appealing to Wall Street for whatever reason. 

Sure there are situations where you see a stock getting beaten down way past fair value and you take a swing because the fundamentals are still solid (Like META at $90), but that doesn't happen that often. Usually, the stock is trading at 52-week lows because they are underperforming. 

It's easier to bet on a winning stock to keep winning vs. a losing stock to instantly turn around as soon as you happen to click the "buy" button!

Portfolio Update

Stock Watchlist

Stocks: TSLA, LLY, ADSK, SBUX, NOW, CELH

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