Full Circle
Posted on May 29, 2025 in Stock Market
The S&P 500 bottomed out on the morning of April 7th when it was down over 15% from year-end 2024. Since that low, the index has rallied nearly 19% and has completely erased the losses. The price-to-earnings (P/E) ratio for the index has recovered as well, climbing to around 21.4x estimated earnings over the next twelve months from a low of about 18x when the market bottomed. This expansion in the P/E multiple happened despite continued downward revisions in both economic growth and earnings estimates. What, if anything, can be interpreted from the market strength in the face of a slowing economy and reduced earnings visibility.
It might help to identify which stocks have been driving the market rebound. A quick look at the chart below shows that the same sectors that caused the selloff are now leading the way higher. The most volatility has occurred within the sectors that house the Magnificent Seven stocks: Information Technology (Apple, Nvidia and Microsoft), Consumer Discretionary (Amazon and Tesla), and Communications Services (Alphabet [formerly Google] and Meta [formerly Facebook]). Probably not a huge surprise to anyone.
The chart below shows that nine stocks, including the Mag 7, have accounted for more than half of the S&P 500’s increase in market capitalization from the April 8 low.
My interpretation of this massive round trip move is that investors continue to view the US mega-cap stocks as both defensive and poised for continued growth. The defensiveness comes from the companies’ rock-solid balance sheets and immense free cash flow, which make these companies a port in the storm even when compared to the US government (which was just downgraded by Moody’s). The opportunism comes from these companies’ investments in budding technologies like the cloud, AI and quantum computing. These massive investments certainly suggest that the US will be able to remain the undisputed technology leader for decades to come.
Does this mean I’m endorsing a strategy of blindly piling into the Mag 7 stocks? Of course not. In some cases, high valuations can be justified by the growth potential while in others that may not be the case. One thing seems clear though. For all the talk about the US losing its “exceptionalism”, that is certainly not the case when it comes to technological innovation. The key, however, is to find the opportunities that not everyone on earth already knows about.
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