Market Update 2/25/25

Valuation Matters

 Equity markets have been choppy for the past several weeks and momentum stocks lead the decline. This comes as no surprise to me as valuations on many of those stocks are stretched with some trading at price-to-earnings ratios (PE) higher than 100. These rich valuations have plagued the indexes, as a whole, with the DOW, S&P 500, and NASDAQ all trading at a PE of 26 or higher. Simply put, many stocks are expensive, and deploying capital in richly valued markets is tricky. But the concentration of money in a few expensive stocks presents opportunities and low PE stocks show signs of divergence.

 Over the past five years, the dominance of the “magnificent seven” stocks has vaulted the valuations of high PE growth stocks to a record divergence against low PE value stocks. Over the last 60 months, the growth index has returned 134% while value has posted just 54%.  However, value is up 4.3% this year while growth is flat.  We anticipated some of this change and own several value positions that have rallied.  Eventually, earnings must be delivered, especially in the super hyped stocks and investors are once again learning that valuation matters.