On January 7th I wrote about The Great Broadening.

Here’s the gist of the post summed up in one quote:

“The story isn’t about “narrow leadership” anymore. The story is about participation and a broadening market.”

Today I want to alert you of a new phenomenon happening underneath the market’s surface and it has less to do with price and more to do with valuations.

Welcome to the Great Re-Rating.

We can argue about whether to use trailing or forward 12-month PE ratios when assessing valuations. I prefer forward PE because it moves in real-time with updated earnings forecasts from analysts.

And these earnings forecasts tend to be very close to reality (assuming we are not in a recession). I’ve written about that here.

Here’s the first visual I want to show you which is a rolling count of the number of stocks within the S&P 500 trading above a 40x forward PE.

In other words, the chart below gives us a pulse on how many stocks in the market are “expensive AF.”

We currently have 27 of these companies within the S&P 500, a level that is consistent with bear market lows. Only difference today is that we’re within 2% of an all time high.

I threw this valuation heatmap together so you can see what I’m talking about on a sector by sector basis.

I’m showing you the % of stocks within each sector that fit into various Forward PE buckets.

For example, looking at Utilities (all the way to the left), 81% of stocks within the sector have a forward PE ratio between 10x and 20x.

And look all the way to the right. The average sector has 52% of its stocks trading between a forward PE of 10x and 20x. I wouldn’t call that expensive.

So the bottom line is this: the S&P 500 is within 2% of highs and valuations have come in significantly. That sounds like a healthy market. I wouldn’t have drawn it up any other way.

Tonight at 5PM ET my colleague Sean Russo and I are joining Michael on an all new edition of What Are Your Thoughts?

I’m always grateful for the opportunity.

The doc is packed. Lots to discuss. Join us by clicking the link below.

This past weekend I best manned my brother Michael and his wife Caroline’s wedding. We had an amazing time up in Newport, RI. Massive congrats to them. If you’re reading this, love you both.

PS: the best man speech is good prep for WAYT. I think? Idk, the nerves were pretty crazy but people said I hid them well.

Ben Carlson published a new monthly market and economic update for clients of Exhibit A this morning.

If you’re an RIA looking to lean into content marketing or level up your client communication, hit the link below and try the platform out (free) for a week.

Thank you for reading!

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