Quarterly Conversations – Today’s Markets

Featuring: P.J. Gardner

In this video, AGW Principal & Co-Founder P.J. Gardner, CFA®, CFP®, evaluates market overvaluation and risks from concentrated tech giants, advocating for diversification and global investment consideration. This conversation was recorded on February 1, 2024, and reflects information available at that time.

Audio Only


  • Market Overvaluation and Concentration Risks: AGW raises concerns about market overvaluation and the concentrated influence of major tech companies on market indices. The firm advocates for a more diversified investment strategy, cautioning against overreliance on a small group of high-valued stocks.
  • Global Investment Opportunities: The dialogue encourages looking beyond U.S. markets to identify investment opportunities, highlighting the disparity in valuations between U.S. tech giants and their international counterparts. AGW suggests that diversification and global investment consideration could mitigate risks and enhance portfolio performance.

Full Transcript

So despite all the risks that exist out there, again, ranging from the potential that the Fed doesn’t get it completely right. And we don’t end up in a soft landing to any number of big geopolitical issues or an usually right, it’s the thing that you’re not thinking about that we’re not even talking about. That’s the rest, that then really impacts the market. So despite all that, the markets are trading very rich.

Typically, what you would see in a price to earnings ratio, which is a broad measure of valuation in the market, you can think of it like price per square foot for real estate, usually, you’re trading around 16-16 and a half times something like that. Today, you trade closer to 20.

So that’s an you’re paying material premium on the expectation, and that’s a forward P e, that earnings are going to be good. And what’s the expectation for earnings, it’s low double digits about 11.4%.

So if that doesn’t come to fruition, and by the way, the analyst’s community in 2023, going into the end of the year, believe we would also have low double-digit earnings growth only to in the year basically, kind of flattish.

If that same sort of reality plays out, right, the earnings in the denominator don’t increase as expected, or then markets are just going to get all the more expensive.

So just the price that you’re paying the value that you’re getting today, it certainly is not cheap. The other thing that concerns us about the market is how concentrated is.

And in the US, Gulf probably read a handful of companies, particularly this different people have different names for but the Magnificent Seven, make up over 30% of the index.

So when you used to buy the S&P 500, you used to think, Gosh, you’re getting a small part of 500 companies. Well, now, when you buy the S&P 500, you’re a therapist, basically, seven companies, so it’s very narrow, and very concentrated.

The other thing that’s happening, if you look at global market cap, the US is making up a greater and greater proportion of the global marketplace, only because it’s gone up in price.

So as things go up in price, they get valued bigger, and in the market cap weighted index, they’re going to make up a bigger portion.

So when you look forward, you have to say, Gosh, I really believe in no small part that these seven stocks are going to continue to rise, moral then a second.

The other thing you have to say, as the US used to make up roughly 40% of global market cap, now it’s over 60.

So you can just play out kind of simple thought exercises in your head if we were to continue to advance, right. So if we were to gain another 20 plus percent of the global market cap, we would own almost 80 to 90%.

Or in other words, US dominated, denominated our US headquartered locations, would basically own 90% of the corporate marketplace. I mean, just the last time we even heard anything like that was Japan’s Ascendance in the 1980s.

And it turned out, they didn’t own everything, either. I don’t think we will. But back to this idea of this magnificent seven. It really is fascinating.

We’ve seen this, this is not new. If you go back to the 60s, there was what was called the nifty 50-50 stocks that despite price, basically, we’re going to continue to grow, and it didn’t matter what price you paid, because over time, you’re gonna be just fine.

Well turned out that was not such a great idea. And it’s interesting looking back at that list of names, you have some companies that have gone on to really succeed IBM, a Coca Cola. But you also have companies like Eastman Kodak or Sears, Roebuck, or General Electric, I mean, companies that either aren’t here or mere shells of their former selves.

And so when you look at this Magnificent Seven, don’t be surprised if, prospectively a couple of decades from now, one or more of those companies is not around? Sure. I think one or one or more of those companies will be incredibly successful. And probably on balance that remaining will do okay, not great.

And as an alternative of some interesting exercise. So you can spend $12 trillion, and by the seven companies. You can also spend the same 12 trillion and by the next largest 42 companies.

The revenue of the Magnificent Seven. So if you if you bought that 12 trillion, you’d have 1.7 trillion in revenue Do the other 40 to 4.4 trillion. So well over 2x profit, that Magnificent Seven during about 358 billion of net profit, profit of the next 40 to double that 714.

So I think people need to be very thoughtful about where they’re investing and how they’re investing. And don’t get caught up in in just the euphoria in the recent performance of what’s happened lately.

It’s fascinating when you get companies of a size like this wrapped around like the video, let’s say, a new technology. You don’t know. I mean, is it worth one and a half trillion dollars? You don’t know? Tesla, I think is a good recent example that it was valued in excess of a trillion dollars, and now it’s gotten gotten half. So was it right? Then at an excess of a trillion? Or is it right now at half the value? I don’t know. But, you know, hundreds of billions of dollars swinging in either direction, is a lot of money.

And so again, that just speaks to the speculative nature of the stocks. I think another thing that’s interesting, people have sort of gotten so complacent and excited investing in the US. It’s worthwhile to look overseas, and gotta remember, companies are not countries.

And I think that’s a mistake investors make. They say, Well, gosh, I’m worried about Germany, therefore, I’m not going to buy a German based company, or I’m worried about any number of things.

But if you just look at it, so you say, okay, talking about Tesla, as we were before, so price for earning 70 times, you can buy Hyundai for four times. I’m not saying that the same company, but as one worth, I mean, gosh, you know, almost 20 times more.

And then, you know, take another example, Apple and Samsung, the Samsung have the same product offerings apple? No, but it does a lot of things incredibly well. It’s half the price. So is Apple worth two times Samsung, I think it’s a good question.

Or take Amazon versus China’s equivalent of Alibaba. Amazon trades at 80 times earnings, Alibaba 10. So I think it’s a good time to sort of step back and reassess where you are because markets have had 15 years and particularly over the last several years. growth in popularity of a handful of companies. And I think what will work going forward probably isn’t what has worked to get us to this point.