TBG Monthly Market Color

Dear Friends,

Firstly, we are keeping our thoughts and prayers with the victims in Ukraine.
With the turmoil over the past weeks, we wanted to recap where market valuations currently sit.
The S&P 500 has been bouncing in a range from 4500 to just below 4200 over the last several weeks.
With Wall Street analysts estimating approximately $220 in earnings per share for the index in 2022 and ~$240 in 2023, this represents a valuation range of about 20x to 19x 2022 Earnings and 19x to 17.5x 2023 Earnings for about 10% growth in earnings.
These valuation ranges compare to a 10-year average Next Twelve Months Price to Earnings ratio of ~17x. (See Fig. 1 below for more details.)
Therefore, the market appears to be trading in line with the long-term average valuation on the selloffs and then bouncing above that average on market rallies (See Fig. 2 for a chart on the S&P 500 valuation over time).
Similarly, the Nasdaq Composite Index has traded to just below 13,000 on the selloffs where it is valued at 22x 2022 P/E and 20x 2023 P/E – in line to just below the 10-year average of about 21-22x Next Twelve Months P/E.
Observationally, we’ve seen companies in technology and growth areas hold valuations in line with approximately 1x their growth rates or higher.
So we believe valuations may be stabilizing to a certain extent.
However and importantly, 2022 and 2023 estimates are still in flux – an issue complicated further by the war in Ukraine, which adds uncertainty to the market and can exacerbate volatility.
Estimates were largely stable through earnings in February with 75% of companies in the S&P 500 beating their estimates and forward 2022 estimates largely remaining flat to up.
Thus far, we have seen noteworthy companies such as Visa disclose that ~5% of their revenues come from Russia and Ukraine while McDonald’s receives 9% of its revenues from Russia and Ukraine but only 3% of its operating profit.
In the interim, much of this revenue is likely to be on hold and in addition, investors will have to grapple with whether demand at home and in Western Europe will decrease because of the war and the subsequent inflation spike.
With valuations trading in ranges and some risk to economic growth, we continue to think its important to have active investments in companies with strong growth stories at solid entry points and reasonable valuations. We think these investments will especially be in demand over time.
To that end and as we noted in our annual outlook, we are heartened to see strong secular growth stories perform well alongside traditional companies in recent weeks. For example, the Renewable Energy industry has been a top 5 performing industry in the S&P 500 over the last month alongside oil / traditional energy companies.

As always, please reach out with any questions.

Thank you,

The Bycoff Group