Some analysts have suggested that we are in the early innings of a new bull-market cycle. The earnings that have been reported over the past three weeks appear to verify that. So far 80% of companies are beating their Q4 earnings estimates by approximately 7.5%. Equally important is the expected growth in earnings, which is now 6% higher than the previous quarter. This sequential growth quarter-over-quarter is exactly what early-stage bull markets look like.

 

Now, there is no doubt that price-to-earnings valuations are running high, (especially on the mega-caps, which have even higher multiples). However, if these large-cap companies can continue to grow their earnings at this pace, it will not take long for them to grow into their lofty valuations. If we dig a little deeper into valuations, we see that most of the companies (other than the mega-caps) are trading at reasonable valuations. The chart below shows the forward price-to-earnings ratios of the Magnificent Seven, the S&P 500 Index, and the S&P 500 without the magnificent seven (S&P 493). As you can see, the S&P 493 is trading at very reasonable valuations. It should also be noted that most of these 493 companies are still trading below their all-time highs, some significantly. We have seen started to see some money flow from the mega-caps to the mid-caps, hopefully this will continue. If it does, it would be very good for the market.

 

Source: Goldman Sachs Global Investment Research as of February 2, 2024

 

 

I've also included a piece from our CIBC Economics team entitled "Head Fake”.

 

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

 

Have a great weekend.

 

Milan