All-time highs aren’t unusual

For many investors, when markets hit all-time highs, pull-backs feel inevitable. This is especially true in today’s environment, where so much of the S&P 500’s return has been concentrated and driven largely by multiple expansion. However, stocks can stay attractive at all-time highs. Since 1950, the S&P 500 has achieved an all-time high on roughly 7% of trading days, and of these highs almost a third became new market “floors” – levels from which investors never get a “second bite of the apple”. 

Not all stocks are richly valued

While the S&P 500 may be more richly valued than its long-term average, there is considerable valuation dispersion within the index. This is because most of the market’s returns have been concentrated in a small handful of tech-focused stocks, with lofty expectations around Artificial Intelligence driving investor enthusiasm. In other words, while the index might be expensive, many stocks within the index are not. Using active management to find them will be critical.

Earnings drive markets and the earnings backdrop is improving

Profits drive equity returns, and for most of this rally the “Magnificent 7” were the only companies generating earnings growth; it is no surprise that they outperformed the rest of the index. However, inflation is cooling, wage growth is easing and interest rates are set to fall. Against this backdrop, the “S&P 493” is projected to see positive earnings growth for the first time since 2022. Investors need to “fish in a bigger pond,” employing active management to identify future winners.

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