This is this week’s chart for today’s Morning Brief. Sign up to receive the information below in your inbox each morning.
Stocks just finished their best February since 2015 and have settled at record highs.
And everyone knows this story. The Magnificent Seven has been driving the S&P 500 (and now the Nasdaq) higher and higher thanks to AI.
High concentration has been a consistent annoyance for many investors, as the upside for some large-cap stocks feels understandably volatile.
2023 was all about the Magnificent Seven. 2024 is about three years away. Not only is the number 7 a smaller and less diverse number than, say, 500, but what we’re actually talking about is an even more singular and less diverse concept: AI.
To some extent, all-time highs always seem vibrant. These milestones are also the sweetest nectar for market bears, who can easily imagine falling into familiar territory that they have only recently left behind.
But this week’s chart offers one metric that recasts this excitement as mostly mediocre.
If we look at the current rolling three-year average return of the S&P 500, we can see that the market’s rise over this period has been almost exactly average.
Currently, this rate of return is approximately 30%. A year ago, it was 34%. Due to the market crash in March 2020, this measure increased to nearly 60% in March 2023.
As DataTrek’s Nicholas Colas wrote this week, the three-year average price-earnings ratio since 1974 is 29% (8.9% per year, compounded). In that context, there’s nothing noteworthy at this point.
Collas researched this metric and found that when three-year returns hit 100%, “history has shown that investors should be extremely cautious.” (This is also easy to remember: “A double is a bubble,” the chorus points out.)
“If you only knew three years of returns for this index today, you would probably think the past 36 months have been pretty routine,” Collas wrote. “There is nothing in today’s analysis to suggest that large-cap U.S. stocks are approaching a bubble.”
While there’s no question that mega-cap stocks’ contribution to the index is outsized, we recently shed light on other factors driving the market higher than the AI hype, which remained a focus throughout earnings season. I guessed.
But as we’ve pointed out, a sustained rise doesn’t have to be widespread anyway. Gain can be concentrated as some sinks and some skips.
This is a point echoed by Mr. Colas, who said the index is “with 500 companies vying for investors’ incremental capital.” If done well, the index can generally produce good returns over a three-year period. ”
story continues
Ethan Wolff-Mann is a senior editor at Yahoo Finance and runs the newsletter. Follow him on Twitter @ewolffmann.
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