SUPERNEWS

Macro

S&P 500 Defies Bubble Fears, Rallies on Solid Fundamentals

S&P 500's resilience backed by strong fundamentals, as Terry Smith's quality investing strategy highlights long-term growth potential.

By Bill Bullington

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3/7, 19:02 EST
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF

Key Takeaway

  • S&P 500's rally, with gains in 17 out of the last 19 weeks, defies bubble fears due to solid fundamentals and economic growth.
  • Largest five S&P 500 equities trade at less than half the P/E multiples of the dot-com era's "Four Horsemen."
  • Despite some sectors trading above their five-year average valuations, broad market support remains with a positive economic outlook and CEO confidence.

Stock Market Resilience

The S&P 500 has shown remarkable resilience, with gains in 17 out of the past 19 weeks, reminiscent of a winning streak last seen in the 1960s. Despite concerns of a potential bubble, the market's fundamentals remain strong, supported by a historic rally that has left investors anticipating a pause. The recent rebound in stocks from an earlier pullback this week highlights the market's ability to weather short-lived selloffs, underpinned by a robust bull case.

Quality Investing Strategy

Terry Smith, the founder and CEO of Fundsmith, has demonstrated a successful investment strategy focused on buying good companies, avoiding overpayment, and maintaining a long-term investment horizon. His portfolio, comprising high-quality companies like Microsoft, Google, Amazon, PepsiCo, and others, reflects a commitment to quality investing. Smith's emphasis on fundamental metrics, such as return on capital employed, gross margin, and operating margin, underscores the importance of investing in companies with strong financial performance and growth potential.

Market Conditions and Valuations

The market's transition from an era of easy money to a more deliberate approach to capital allocation has led to a reevaluation of stock valuations. Companies are now prioritizing cash flows and prudent spending, resulting in a shift towards more sustainable growth strategies. Despite underperformance in 2022, attributed to sector-specific challenges, Smith's investment philosophy remains rooted in identifying high-quality companies with growth potential at reasonable valuations. The comparison of free cash flow yields between Smith's portfolio and the S&P 500 highlights the attractiveness of his holdings relative to the broader market.

Long-Term Investment Approach

Smith's strategy of doing nothing, characterized by low portfolio turnover and a focus on long-term holdings, underscores the importance of patience and conviction in quality investments. By holding onto core positions for extended periods, Smith emphasizes the value of consistency and discipline in navigating market fluctuations. His commitment to engaging with company management and addressing concerns underscores a proactive approach to driving positive change within his portfolio.