Here comes the overvalued brigade

The stock market is doing well again, which is a positive for most investors. The end of 2023 saw a surge in valuations and this has continued into 2024, so far. But not everyone is happy. Those who continually sit on the side lines, pointing out that the market is overpriced and is due a correction, at which point they will step in and clean up.

The Magnificent 7

Most of the growth has been caused by “The Magnificent 7”; Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla. These seven companies make up almost 30% of the S&P 500. They have contributed half of the indexes return since the start of 2023. Nvidia’s share price has quadrupled, Amazon’s has doubled, Microsoft’s is up 70%, while Alphabet’s is up 60%. After years of phenomenal growth, Tesla has become the runt of the group with some questioning whether they should be included in the moniker.

While their share price has increased significantly over the last year, this is not a bubble. The share price increase is matched by their earnings, which has consistently grown in line with their share price growth. Things don’t look like slowing down for these companies with earnings expected to stay strong. And as AI continues to accelerate, these companies are going to be key beneficiaries of it.

Get the average return

When we invest, we always expect our money in the future to be worth more than it is today. Sometimes you lucky with buying into the market just before a rally and sometimes you are unlucky and buy just before a crash. But market timing is nothing but guess work and while we always accept a bit of luck along the way, it is not a strategy.

I ran the 20 year returns of the S&P 500 starting in 1976, increasing in increments of one year. In not one instance would you have made a loss after 20 years investment. The worst annualised return was 3.43%. If you had invested €100,000 in 2000, you would have €196,304 at the end of 2019 (the best investor who invested in 1980 had €1,956,166 after 20 years!). While there is a massive difference between the two, they are extremes. The average return is 8.08%. This means your €100,000 is valued at €473,049 after 20 years. We should all be happy with that type of return.


Steven Barrett

04 March 2024