Valuation Dispersion Favors Selectivity

US equity markets have continued to climb off their April lows in the face of persistent headwinds, seemingly in anticipation of Federal Reserve rate cuts. Indeed, markets cheered the Fed’s 25 basis point reduction in its policy rate last week, and expectations of two additional cuts before year end may continue to provide support. In our view, however, the prospect of easier monetary policy alone isn’t a particularly compelling reason to invest in the continued success of what is a richly valued US stock market.

That said, we believe the current environment does present an interesting dynamic for bottom-up stock pickers. While the US equity market appears quite expensive relative to historical levels by any number of metrics, its extreme concentration—the 10 largest companies in the S&P 500 Index comprise about 40% of its total market cap and trade at price multiples even higher than the index’s median—suggests pockets of opportunity may be found in its less-stretched corners.¹ Healthcare comes to mind as a sector in the US where we are seeing what we believe to be attractively valued opportunities.

Dispersion is even more evident on a global basis, as non-US markets generally appear quite a bit cheaper than US markets even after their strong year-to-date outperformance. This is true both on an absolute basis and relative to the long-term trend; international equities currently are trading a lot closer to their historical median than to the 90th percentile-plus levels seen in the US.² With that backdrop, we are finding interesting bottom-up opportunities across a range of non-US markets and sectors, including certain Latin American and European consumer names, Japanese industrials and Southeast Asian holding companies.