The top 10 companies in the S&P 500 make up 35% of the market cap but only 23% of earnings, see chart below.
This divergence has never been bigger, suggesting that the market is record bullish on future earnings for the top 10 companies in the index.
In other words, the problem for the S&P 500 today is not only the high concentration but also the record- high bullishness on future earnings from a small group of companies.
Households have record-high expectations for how much home prices will be going up over the coming five years, see chart below.
And, as discussed last week, households are also very bullish on the equity market, see here.
Looking ahead, extreme bullishness about home prices and stock prices makes the economy more vulnerable if asset price inflation stops or reverses.
Following the recent publication of our Mid-Year Economic Outlook, our credit team published our inaugural Mid-Year Credit Outlook paper yesterday. It’s available here.
The key themes we explore in this paper are:
The buoyant demand for corporate debt that propped up primary markets this year came alongside pockets of distress in the riskier parts of the market. We expect this divergence to persist through 2024. In this outlook, we’ll explore the bifurcation in the market, investment themes—from AI to elections—in opportunistic credit, the vanishing liquidity premium in investment grade debt, and the relative value of BDC’s unsecured debt.
Key Takeaways
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The Standard & Poor’s 500 (“S&P 500”) Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value.
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It is difficult to be negative on the economic outlook when household net worth relative to income is near record high levels, see chart below.
Listen to Apollo’s Global Head of Content Strategy for Client and Product Solutions J.P. Vicente and Chief Economist Torsten Slok discuss the precarious outlook for the US economy as policymakers try to tame inflation without sending the economy into recession. It’s a wide-ranging conversation that includes the outlook for the GDP growth, inflation, interest rates, and consumer spending.
Measures of liquidity in Treasury markets continue to send worrying signals, with the average yield error approaching 4.5, see chart below.
Last week, we published our mid-year outlook, it is available here. For private equity, there are three themes:
1. Interest rates will remain higher for longer due to strong near-term growth, deglobalization, the energy transition, increased defense spending, rising Treasury issuance, and US fiscal deficits.
2. With rates higher for longer and growth eventually slowing down, opportunities in private equity will likely continue to emerge among potential distressed companies.
3. Ongoing uncertainty and volatility in the broader market call for a flexible, value-oriented strategy in private equity. Strategies with the ability to invest opportunistically across the capital stack are well-positioned to capitalize on the shifting fortunes of companies seeking financing in these turbulent times.
Our private equity chart book is available here.
Last week, we published our mid-year outlook, it is available here. For real assets, there are three themes:
1. Interest rates will remain higher for longer due to strong near-term growth, deglobalization, the energy transition, increased defense spending, rising Treasury issuance, and US fiscal deficits.
2. Office remains particularly weak for a variety of reasons, including work from home and higher interest rates, but other real asset sectors are showing resiliency. Secular growth trends continue to persist for industrial, multifamily, as well as specialty areas such as data centers, cold storage, self-storage, and student housing.
3. The opportunity remains more compelling towards real estate debt than equity on a risk-adjusted basis in the current cycle. Real estate credit can offer a more attractive proposition due to high base interest rates, widening spreads, more protective loan structures, as well as expectations of higher-for-longer rates.
Our real assets chart book is available here.
The FOMC has started to revise higher its estimate of where the fed funds rate will be in the long run. This is likely driven by upward pressures on inflation and rates from deglobalization, the energy transition, more restrictions on immigration, more defense spending, and higher levels of government debt.
