Heading into the end of the year, the investment market has given us and our clients plenty to be thankful for. Even so, more than one client contacted us recently with thanks, but also a request. Despite beating their benchmarks for 2024, these clients wanted more. Each client initially asked for a balanced portfolio focused on downside protection (and sometimes a yield target). Then, the blazing S&P 500 stock index ended September up 36% for the past 12 months. While this index has more volatility and downside than their benchmark, the Fear Of Missing Out (FOMO) can be a powerful immediate influence on even seasoned professionals.
US Large Cap Growth investments have broken almost every rule from traditional investment advice. The truth is Large Cap Growth stocks, represented by either the Nasdaq or the Russell 1000 growth index, have smashed all expectations by returning an annualized 16% over the past decade. This growth, in large part driven by tech and the continuing AI revolution, has surprised value investors and professional giants like JP Morgan, who continue to project only 7% annualized gains for US large cap stock. There is no reason to expect mean reversion at any point in time, and being early can be indistinguishable from being wrong.
Transformative technologies often follow a predictable pattern: innovation, adoption, euphoria into a bubble, and eventually, correction. The railroad boom of the 1840s, the internet revolution of the 1990s, and even the smartphone era of the 2010s all demonstrated this cycle. The Dot Com bubble of 2000 took 5 years to build, 1 year to burst, and from 7 years (S&P) to 15 years (NASDAQ) to get back to even. Getting caught on the wrong side of a bubble can be incredibly punishing.
The Nasdaq index forward price-to-earnings ratio (P/E) hovers near 27, down from the peaks of the dot com era, but still elevated compared to longer term historical averages near 20. Investors placed $26B into the Nasdaq ETF (QQQ) in 2024 alone, with over a hundred ETFs focused on AI, Cryptocurrency, and hyper growth stocks representing billions more. Many of these funds launched within the last year. Some of the highly valued and highly volatile stocks include Gilead Sciences (GILD) and Palantir (PLTR) with P/E ratios above 500.
At Equitas, we’ve developed comprehensive frameworks for evaluating AI investments beyond the headlines. Our Navigator system incorporates both technical and fundamental factors to automatically reposition clients between high-risk growth investments, and safety. While we expect significant volatility ahead, the underlying trend remains one of the most powerful in market history. As of today, the momentum continues and could even increase. Bubbles tend to get frothy before they burst. The key to successful navigation will be maintaining exposure while building in safeguards against inevitable market excesses. Please contact us to learn more about our systematic approach to managing technology exposure.
In 2002 Equitas Capital Advisors, LLC was established as a unique company that blends the resources of a large global corporation with the flexibility of a small boutique firm. The registered service mark of Equitas Capital Advisors is Engineering Financial Solutions® and the purpose of Equitas is to design, build, and deliver investment solutions to meet the goals and objectives of our investors. Equitas Capital Advisors, LLC located in New Orleans, has over 200 years of combined investment management consulting experience providing professional investment management services to investors such as foundations, endowments, insurance companies, oil companies, universities, corporate retirement plans, and high net worth family offices.
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Above information is for illustrative purposes only and has been obtained from reliable sources but no guarantee is made with regard to accuracy or completeness.
This information including any specific securities mentioned is for educational, entertainment and illustrative purposes only and not a recommendation or solicitation to purchase or sell any individual security. You cannot invest directly in an index.
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Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment or strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals, and economic conditions may materially alter the performance of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for an investor. Charts and references to returns do not represent the performance achieved by Equitas Capital Advisors, LLC, or any of its clients.
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