2024 Source of Returns

The concentration of performance amongst a small group of stocks has some of the hallmarks of past "bubbles." The weighting of the top 10 stocks in the S&P 500 has reached 37.5%, far exceeding the 26.6% weight of the top ten in early 2000. Investors with some experience may remember the "unwind" of the 2000 market was not particularly pretty.

While it was the internet in 2000 that made things "different," today, it seems to be the promise of artificial intelligence (AI) driving this narrow band of performance. Individual stocks like Nvidia (ticker NVDA) have shown eye-popping returns and extremely rapid revenue growth. Yet a look at the performance of various market indexes, both domestic and international, shows returns year-to-date have not been from enthusiastic investors paying an ever higher multiple for growth.

This week's chart decomposes year-to-date returns into dividend yield, earnings per share growth, currency effects (not applicable to domestic indexes, of course) and multiple expansion with the dot showing the year-to-date performance. In only two areas have we seen multiples expand- the MSCI EAFE index, which is dominated by Europe and Japan, and another global index, the MSCI ACWI (All Country World Index) ex-US. In every other major market, multiples have declined or not gone up.

We found this most interesting in the chart's top-performing market, large-cap domestic growth stocks, represented by the S&P 500 Growth index. The index is up 15.5%, yet earnings are up even more, at 20%+. This means multiples have actually declined during this period of overall outperformance. Maybe investors have not been enthusiastic enough?

Looking across different valuation measures, one cannot say that stocks are cheap. We are at relatively high levels in measures like price/book, price/sales, trailing 12 months P/E, next twelve months P/E and even longer-term measures like the Schiller CAPE. Yet it might be some of the best performing stocks are earning their performance with exceptional earnings growth.

The valuation of stocks does matter as we consider longer-term performance, but in the short run, valuation is a very poor market timer. And, of course, valuations can go down in a couple of ways. The painful way is where stock prices fall, or the less painful way is where stock performance may slow, but earnings continue to rise and "catch up" to lofty expectations. What our future holds is not clear, but investors have been right so far in paying up for the fastest-growing companies in the S&P Index.

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