The S&P 500 Cycle
As we enter the fourth quarter of 2024, it feels a lot like the 1993 hit movie Groundhog Day. In that classic rom-com, Bill Murray’s grumpy character gets trapped in a time loop while covering the annual Groundhog Day event in Punxsutawney, Pennsylvania. Similarly, we find ourselves stuck in our own perceived time loop, revolving around the continued performance dominance of the S&P 500, particularly the handful of tech-forward mega-cap stocks.
Just like in 2023, the S&P 500 has been one of the top performing indices globally, with performance primarily driven by just a few big names. Following double digit gains earlier this year, the combined market capitalization of the top seven names in the S&P 500 now exceeds $15 trillion – more than half of the entire GDP of the United States, which stands at just over $25 trillion. Many consider this concentration as an obvious byproduct of these companies’ high growth rates and, in some cases, their arguably monopolistic market power. While we acknowledge that some of these companies are uniquely positioned for continued global dominance, we question whether their current valuations align with reality. Are these great companies also great investments?
We are not suggesting that this trend will reverse imminently or even soon. However, the current market conditions have caused us to position our portfolios to be mindful of the risks associated with overbought markets. Specifically, we have implemented several positions that allow us to participate in the potential upside of the S&P 500 while also providing downside protection in the event of a market correction. Moreover, we are diversifying exposure across the market cap spectrum and globally, focusing on less expensive companies with potentially higher upside. We have also taken advantage of a higher yield environment to purchase high-quality fixed income, which could serve as a ballast during periods of market stress.
Bill Smead, a well-known value investor, recently quipped, “We are at the ball with Cinderella. We know that at midnight everything turns to pumpkins and mice, but there are no clocks on the wall.” Although we take this cheeky analogy with a grain of salt, it serves as a reminder that markets can defy expectations longer than we might anticipate. However, with valuations stretched and growth rates moderating, we believe it is prudent to remain vigilant and flexible. We are grateful for our wide opportunity set, enabling us to find solid investments at attractive valuations regardless of how long this particular market chapter lasts.
