Quarterly Conversations – Third Quarter State of the Market

Featuring: P.J. Gardner

In this video, AGW Principal & Co-Founder P.J. Gardner, CFA®, CFP®, discusses the current market valuation and whether or not investors are being too optimistic. This conversation was recorded on August 7, 2023, and reflects information available at that time.

Audio Only


  • The high price-to-earnings ratio
  • The expectation for strong earnings growth, even in the face of a potential recession
  • The concentration of the market in a handful of stocks

Full Transcript

So an interesting question is, what should investors be paying in terms of valuation in today’s market, and given what to us looks like a tremendous amount of uncertainty, and the and the potential for a policy mistake, either monetarily or fiscally?

So with all that uncertainty, markets still trade at a premium, in just the 25-year average has been about 16.8. Looking at price-to-earnings multiples, which is not a perfect measure, think of it like price per square foot for real estate; it does vary. But I think it’s a pretty good indicator.

We’re sitting today at over solidly over 19 times earnings. So you’re paying a premium for companies, even when it looks like a recession is on the horizon or at least has a high probability of occurring. And when a recession happens, not surprisingly, you get an earnings recession along with that. So GDP goes down, and with GDP, so does go earnings.

Interestingly, if you look at that right now and analysts appear to be whistling by the graveyard and not concerned about that, and pointing to it seems like everything concerned with AI is going to be the savior for earnings.

Expectations for earnings have increased dramatically. So you were at about $230 on S&P 500 earnings at the end of 2022. Now, you’re 275. So big expectation in earnings increase, it’s not uncommon to get 15-20% or more of an earnings recession in an actual recession.

If that happens, that’s going to make that 19.5 even more expensive, right, the denominator and earnings is going to fall in with that, and that multiple is going to go up. So to us at a time where caution, prudence, and discipline should be front of mind, it seems like investors are throwing caution to the wind and willing to pay just about anything.

And the other question is, what are you buying? So, the indexes are increasingly concentrated. The NASDAQ had to reconstitute itself, creating gains for investors because they had to trim down levels because of how concentrated the market is up at the top with the Magnificent Seven, as they’re now being called. But it is wild. I mean, so much of market appreciation has been driven by a handful of stocks. And those handful of stocks traded pretty rich prices.

And so whether AI generates the profits, and by the way, would need to do that pretty imminently, or not, I would say ex-ante, it’s hard to figure out exactly who’s going to be the big winner. You’re seeing people place some very large bets on who the companies are that they think will win, with Nvidia being, of course, top of the list. I think last time I checked, trades are something like 55 times earnings, and I think over 40 times sales.

So it’s a very difficult environment, just buying the market more broadly; what we’re recommending to clients is trim some of that passive exposure into the strength that the market is giving you. They’re giving it to you. We didn’t expect the market to have this big of an increase at the beginning of the year. And yet, here we are. So, sell into that strength and rotate that to active managers that are more focused on fundamentals.

I think in 2022, you saw a glimpse of what real markets look like: markets where capital isn’t abundant and cheap, but it’s scarce, and it has a real cost management matters in those environments. And I think that’s what we’re going to see yet again because that’s what we’ve always seen.

AGW Capital Advisors is a registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a member of the AGW team, another qualified financial adviser, and/or tax professional before implementing any strategy discussed herein.