Companies that are trading at low valuations with high growth rates are the best. If you could find these companies, you would buy them any day!

 

Sometimes we get so focused on new technologies (artificial intelligence), and the flavour-of-the-day (Magnificent 7), that we forget to look at other sectors. As you can see from the chart below, the Russell 2000 (small caps) is very cheap relative to the S&P 500 (large caps). Currently, small-cap stocks are trading at a 40% discount in valuation in comparison to large caps.

 

 

Combine this with the fact that the Russell 2000 is expected to grow earnings by 11.5% next year, which is faster than the 9.2% expected earnings growth of the S&P 500, and you may start to think that this could be a buying opportunity!

 

 

If the Russell 2000 were to revert back to its historical average price-to-earnings ratio, it would equate to a 40% jump from current levels. Meanwhile, if the S&P 500,or the Mag Seven traded to their historical averages, they would have to drop in value.

 

Sometimes, investing does not need to be complicated... The Magnificent Seven and the S&P 500 are trading above their historical price-to-earnings ratios, while mid-cap and small-cap stocks are trading below their historical averages (and growing their earnings faster than the S&P 500). Investors might potentially see investing in mid and small caps as a recipe for success!

 

I have also included a piece from our CIBC economics team entitled “Commodities: “meh” is the message”.

 

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

 

Have a great weekend.

 

Milan