In all types of investing, what you think you are getting is often not what you are really receiving. It is an adage because in most baskets of stocks, there are leaders and losers and what you are hoping for is the leaders outweigh the losers and you end up positive. This adage is the reason to invest in the S&P 500 – all are easily tradeable, easy to follow, you are hoping the top 100 will outweigh the rest and because in index funds the losers are changed every 6 months, over the long term the S&P 500 index will go up. This year there is confusion.

In an article by Jamie McGeever of Reuters, this year’s rally entirely driven by a handful of stocks and the rest have barely moved. The top 4 stocks by weight – Apple, Microsoft, Amazon and Nvidia account for 19% of the index’s entire $34.4 trillion market cap. They are up 45%, while the other 496 stocks are barely up 2%, while the index as a whole is up 8%.

According to Tajinder Dhillon, a Refinitiv analyst, the aggregate 12-month forward price/earnings (P/E) ratio of the top 4 stocks is 31.6 compared with 16.4 for the other 496 companies and 17.9 for the index as a whole.

Keith Lerner, co-chief investment officer at Truist in Atlanta, calculates the 4 stocks’ average 12-month forward P/E ratio as 42. This compares with a 10-year average of 49.6. The average 12-month forward P/E ratio for the other 496 is 20.8.

Whatever way you cut it; the mega stocks are extremely expensive relative to the other rest of the market.

Analysts at JPMorgan point out that as a share of total shares outstanding, tech has the lowest short interest across US equity sectors. Everyone wants a piece of the Big Techs, from central banks to mom & pop investors in their 401 accounts, for many reasons – safety, liquidity, an interest rate and valuation play, a bet on AI, a nod to ESG. There continues to be a multiple reasons why to own Big Tech stocks for the short and long term.

Linking to dividend paying stocks, while you own them for the dividend over the long term, part of the reason you buy them is potential growth. Profitable stocks which can pay dividends over the long term tend to go higher. The most widely used stock market indicator is the P/E Ratio and it is a ratio which allows you to compare what is relatively inexpensive today and what history tells you the P/E Ratio could be. Then you have to do your homework to determine which stock to buy as it moves to another multiple upward as well as paying a healthy dividend.

There are more questions than answers, till the next time – to raising questions.