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Milan Cacic

May 26, 2023

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DON’T LOOK UNDER THE HOOD?

The S&P 500 is up about 7% so far this year. On the surface this sounds like a pretty good start for 2023. However, when you look a little deeper you realize that things may not be what they seem. The 15 largest companies account for 110% of this performance while the 485 other companies are actually down so far this year.

 

The rise in the “mega cap” stocks has created a divergence in valuations between the these companies and the rest of the S&P 500. As you can see from the chart below, the 15 largest companies trade at 29.3 times earnings while the S&P 500 equal weight trades at 16.1 times earnings. Either the 15 largest companies are overvalued or the 485 other components of the S&P 500 are undervalued – or perhaps, maybe a little bit of both?

 

Graph

Source: Dynamic Funds: Macro Musings

 

A.I. could potentially grow earnings significantly.

 

There is no doubt that the smaller Companies in the S&P 500 are cheap. However, the “mega cap” companies that traded at high multiples have the greatest possibility to use artificial intelligence to increase their earnings. Every time you hear headlines of “META (formerly Facebook) cutting 10,000 staff” you can assume the savings on those salaries will end up as earnings on the balance sheet. The question is can the company still operate at the same capacity without those employees. Enter artificial intelligence to make up the difference. If artificial intelligence can make employees more productive then it's quite possible that these large-cap companies can accelerate their earnings growth over the next year or two. Time will tell!

 

I've also included a piece from our CIBC Economics Team entitled "Squeezing on the balloon".

 

As always, if you have any questions please feel free to give us a call at any time.

 

Have a great weekend.

 

Milan

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CIBC Private Wealth” consists of services provided by CIBC and certain of its subsidiaries through CIBC Private Banking; CIBC Private Investment Counsel, a division of CIBC Asset Management Inc. (“CAM”); CIBC Trust Corporation; and CIBC Wood Gundy, a division of CIBC World Markets Inc. (“WMI”). CIBC Private Banking provides solutions from CIBC Investor Services Inc. (“ISI”), CAM and credit products. CIBC Private Wealth services are available to qualified individuals. Insurance services are only available through CIBC Wood Gundy Financial Services Inc. In Quebec, insurance services are only available through CIBC Wood Gundy Financial Services (Quebec) Inc.


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