Generation PMCA Q4 2024 Quarterly

2025-02-17 03:35:00 ET

Summary

• Elevated market expectations and speculative trading, reminiscent of past bubbles, suggest potential overvaluation and a high risk of disappointing returns.
• U.S. tech stocks and S&P 500 are trading at historically high multiples, with earnings growth expectations potentially unrealistic and susceptible to economic downturns.
• Concentration in top S&P 500 companies is unprecedented, with historical data indicating potential underperformance and negative returns when valuations are this high.
• Defensive strategies are recommended, focusing on undervalued quality businesses, hedging against market declines, and seeking opportunities outside the overvalued U.S. market.

TOO GREAT EXPECTATIONS

You know there’s too much speculation when stock market participants, who’ve become obsessed with rapid trading, including zero-day options (highly speculative leveraged instruments with same-day expirations), are having to attend Gamblers Anonymous meetings.

Market return expectations are at a high and borrowing to invest has surged, which is unusual when borrowing rates are unfavourable. A similar phenomenon occurred during the '99/00 tech bubble and near the markets’ peak in 2007. Strategists are also sanguine, expecting above-average double-digit stock market returns again in 2025.

The expectation for U.S. tech stocks earnings growth for this year is way above the actual trailing 5-year growth rate of 11%, whereas historically there’s little deviation. Either IT earnings are about to take off or expectations are clearly out of whack. At 27x forward earnings, the tech market is expensive historically, but assuming 11% earnings growth, more in line with history, the resulting multiple—above 30x forward earnings—is sky high—a level only previously achieved in the dot-com bubble. Yet the amount flowing into tech-sector ETFs is at an all-time high market share compared to all ETFs....

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