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Market MovesNovember 20, 2023

Tech Stocks’ Multiples Too Rich to Keep Fueling S&P 500 Rise, Says Sage

Historically, when the sector’s P/Es are this high, its market performance flags over the next 12 months, per Jack Ablin.

By Larry Light

Tech stocks have propelled the market’s advance for some time now. But what if tech, particularly its top players—the so-called Magnificent Seven—stalls out? That is a very possible scenario, according to Jack Ablin, CIO and founding partner of Cresset Capital Management LLC.

In a research note, Ablin pointed to a wide gap between the S&P 500 information technology sector’s high price/earnings multiple of 30.7 and that of the entire index, 20.4. That tech premium, of 50.5%, likely will be a drag on the tech sector’s returns going forward, he wrote: “Historically, tech has had a tough time outperforming the market over the subsequent 12 months at such wide valuation differentials.”

In other words, tech prices are already too expensive for investors to stomach buying them if prices go even higher. A year ago, the gap was just 25%, Ablin went on, meaning that tech had more room to grow—and to take the entire index up with it. Over the ensuing 12 months, the tech sector rose 49.5%, while the S&P 500 itself was up 14.3%. By market cap, the tech sector has slightly more than one quarter of the entire index, vastly outdoing other sectors.

For Ablin, a well-regarded market analyst, the reason to doubt future price appreciation of tech stocks goes beyond historical quant stats and sticker shock. There is strong doubt that tech’s earnings in coming quarters will be spectacular enough to propel the sector’s stock prices sharply upward, he reasoned.

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“Notwithstanding the market’s recent reversal, this year’s remarkable performance has left the market’s largest tech stocks vulnerable, as investors worry about future profits,” he indicated. Third-quarter earnings reports from Alphabet, Meta and Apple “were met with widespread selling,” as they did not dazzle, he stated.

The slide that began in August (but appeared to reverse this month) lowered P/Es, but they still are too high, Ablin opined. “Tech behemoths nonetheless remain fully valued, and future earnings growth expectations could be in doubt,” he added.

To be sure, a number of market forecasters see good days ahead next year, both for tech and the overall index, FactSet Research reported. For Q1 2024, analysts predict a year-over-year earnings expansion of 6.7%. For Q2 2024, they project earnings growth of 10.5%. That is better than the 4.1% in the just-completed third quarter and the expectations for the current December-ending period, only 3.2%.

The reasons: an anticipated inflation slowdown in both materials and pay and a leveling off of interest rates, if not a reduction. Those factors’ effects on the Magnificent Seven, tech in general and the overall market remain to be seen.

CalPERS Pledges to Boost Low-Carbon Assets to $100B

The $462 billion pension giant will more than double those assets as it aims to halve the carbon-emissions intensity of its investments by 2030.

By Michael Katz

The California Public Employees’ Retirement System announced it will commit $100 billion in assets to a new sustainable investing strategy aimed at accelerating its portfolio’s progress toward reaching net-zero carbon emissions. The pledge would more than double the nearly $47 billion in low-carbon assets the pension fund currently holds.

Under the new strategy, the $462 billion pension fund aims to cut the carbon emissions intensity of its investments by half in slightly more than six years as part of its goal of reaching net zero by 2050. The strategy also includes efforts to diversify corporate leadership and enhance existing policies that support sound labor principles.

“Our 2030 strategy for sustainable investing is the next step in CalPERS’ efforts to improve our long-term investment returns while also making meaningful progress in the fight against climate change,” CalPERS CEO Marcie Frost said in a statement. “In addition, we are continuing the important work of promoting inclusive corporate leadership and the rights of workers.”

According to CalPERS’ announcement, the sustainable investing strategy is based on “the belief that responsibility for decarbonizing both the portfolio and economy should not be passed off to others by a passive divestment effort.” The new plan partly relies on financial backing for companies that are committed to transitioning to “green” energy production from “brown.”

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The pension will also begin surveying external managers to keep track of their diversity and efforts on regulatory requirements and shareowner action under the new strategy, which it added will focus on human capital management by advocating for more corporate reporting, improved workforce valuations and the promotion of labor principles aimed at ensuring fair treatment of workers.

“These investments, which we believe can be made across an array of asset classes, will be designed to generate excess returns and boost our earnings in service to the mission of meeting our members’ retirement dreams,” Peter Cashion, CalPERS’ managing investment director for sustainable investing, said in a statement.

According to CalPERS, the strategy will set clear accountability for the reduction of companies’ carbon footprint, and its investment managers will develop a process to exit certain securities that do not have a credible net zero plan.

“We believe in engaging with these companies,” Cashion said. “But we will make it clear that refusing to move toward climate solutions puts our investments at risk, which is counter to our fiduciary duty.”