Looking beyond valuations

A common refrain about investing in US stocks is valuations. As illustrated in the chart below, the valuation of the S&P 500 index appears relatively extended versus its own history and other regional markets. 

As of 31.03.2024, the S&P 500 index is trading at around 21x forward price-to-earnings (P/E), meaningfully above its past 15-year average¹. This compares unfavourably to other regional equity markets such as Europe, Asia Pacific ex-Japan, Japan, and Emerging Markets where P/E valuations are closer to their respective past 15-year averages.

Yet this belies the fact that there is wide dispersion in valuations within the S&P 500 index itself. As the chart below illustrates, there is a wide divergence between the valuations of the top 10 largest constituents of the index and its remaining members¹. 

Indeed, the higher valuation of the overall index can be explained by rising market concentration of the 10 largest stocks by market capitalisation. Accounting for over 33% of the overall index², the ebb and flow of these 10 stock names could affect headline numbers, potentially masking interesting opportunities under the hood. 

The collective influence of the 10 largest stocks is not insignificant. Case-in-point, while the S&P 500 index climbed 24% in 2023, it was a narrow-breadth rally with the top 10 stocks accounting for about 86% of the annual price return³.

Looking under the hood to differentiate opportunities

Yet in the first quarter of this year, we’ve observed a dispersion in the performance of the 10 largest US stocks, with some names scaling new heights while others seemingly struggle to break through⁴. Coupled with the wide dispersion of intra-sector valuations, an active approach could be useful to seek out mispriced opportunities.

Moreover, a changing macroeconomic environment marked by higher-for-longer interest rates, higher cost of capital and elevated geopolitical risks could present challenges for various sectors and companies – some more so than others – and invariably create potential winners and losers. This underscores the importance of a robust investment process to help manage risks and differentiate opportunities from the bottom-up. 

Harnessing a time-tested approach to investing in US equities

To that end, the JPMorgan Funds – America Equity Fund (“the Fund”) leverages a systematic, disciplined and rigorous fundamental research process to seek out high conviction ideas from the ground-up, across both growth and value investment universes⁵. 

• On the growth side of the portfolio, the Fund seeks out durable franchises with large and/or growing addressable markets, sustainable competitive advantages and robust management teams.
• On the value side, the Fund seeks out durable businesses with solid cash flows and attractive valuations.  

Through a focused portfolio of around 20 to 40 stocks that blends high conviction value and growth ideas⁵, the Fund has been able to achieve competitive returns over time.

Take the A (dist) – USD share class as an example. As of 31.03.2024, the Fund has outperformed the S&P 500 benchmark across the 1-, 2-, 3-, 4- and 5-year time horizons as well as since inception⁶, with returns driven by active management. (Click here to check the latest performance of the Fund.)

Active management for active markets

Index concentration, valuation and performance dispersion, and fast changing macro-economic conditions describe a market environment that requires an active approach, in our view. It underscores the importance of staying active to manage risks and seek out quality opportunities. An active approach supported by a robust bottom-up fundamental research process, can be useful to uncover lesser known, higher quality names that could present enduring opportunities for consistent returns.