S&P500 Bifurcation

From last week’s employment report, we learned that the US economy created 336,000 jobs in September—which was better than expected. In the week ahead, we will get CPI inflation data. The consensus expects headline inflation to come in at 3.6% and core inflation to come in around 4.1%—still above the Federal Reserve’s 2% inflation target. Taken together, we can assume that the Fed is not done with raising rates. This “higher for longer” scenario is biting harder and harder on consumers and corporates. In looking at how markets are trading against this backdrop, we’ve been tracking the sizable divergence happening in the S&P500. The S&P7, the seven biggest stocks in the index, are up 50% so far this year. Meanwhile the S&P493, the vast majority of stocks in the index, are essentially flat. The bottom line is that if you buy the S&P500 today, you are basically buying a handful of companies that have an average P/E ratio of around 50.

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