Raymond James Investment Management: "Investors should not be concerned about high valuations of US stocks"

Investors shouldn't be worried about high valuations in US stocks but should focus on growth in what is now a "winners' market," says Matt Orton, chief strategist at Raymond James Investment Management, writes CNBC.

The S&P 500 is cruising at all-time highs, but Orton says more stocks are participating in the rally than in the past, and pullbacks should be used as opportunities.

Much of the strong appreciation of the past eighteen months has been driven by the tech giants, dubbed the "magnificent seven", but their evolution has begun to diverge. From the start of the year to the end of last week, Apple shares were down 10%, while Tesla was down 34%. Microsoft, Amazon and Meta (formerly Facebook) were up 11%, 15% and 37%. Nvidia's advance was 77%, and shares of Alphabet (Google's parent company) are about the same level as at the start of 2023.

"We're back to a selection market - idiosyncratic risk is finally rewarded, which for me is the most important. That means you have an opportunity to diversify your portfolio and really target what's working," Orton said on CNBC yesterday.

In his opinion, the fact that Apple and Tesla have lagged behind, while other companies in the "magnificent" group continue to perform shows that fundamentals matter again. "There are many (n.r. companies) with solid foundations, not only among the "magnificent ones". Industrials, financials are starting to improve", the strategist said.

Some Wall Street analysts argue that US stock valuations are too high. Nvidia trades at a multiple of around 35 times earnings estimates (forward P/E), according to FactSet data, and the average of the "magnificent seven" is 34. Also, the S&P 500 index has a level of 21, above the average of the last twenty-five years old, about 16. The forward price-to-earnings (P/E) ratio compares a stock's price to the stock's expected earnings, and traditionally, a high P/E ratio can signal that the stock is overvalued.

In Orton's view, historical comparisons are irrelevant because today's market composition is very different from what it was in the past. "Don't worry about what the market looked like 20, 30 years ago, because now it has a more pronounced growth focus - not just in technology, but also in industrials, consumer discretionary, parts of the healthcare sector. healthcare - and pay a higher multiple for growth companies," the strategist said.

Growth stocks are expected to have above-average upward earnings growth, often due to their position in fast-growing industries such as technology and artificial intelligence, or because they have unique offerings that give them competitive advantages (for example, companies from the pharmaceutical sector that offers highly sought-after slimming drugs).

"It's all about growing profits, identifying those fundamentals and trying to avoid areas of the market where there is no positive inflection in earnings," Orton said on CNBC.