Investment Thesis
I recommend holding the SPDR S&P 500 ETF Trust (NYSEARCA:NYSEARCA:SPY). Anyone who has invested in the S&P 500 in recent years has definitely made an excellent choice, as evidenced by the return of over 80% in the last 5 years.
However, I have some statistical data that indicates that the risk-return ratio on investment appears to no longer be so attractive. A recent survey analyzed equity returns since 1995 and showed that the best returns come before the FED cuts interest rates, however we are already reaching the expected average returns.
Another even more interesting source shows that in years when the president sought re-election, regardless of whether he won or not, the S&P appreciated on average 16%, however the index is already appreciating more than that in 2024.
Finally, the S&P500 and the American market in general has the highest ROE of any market in the world, however its P/E again shows little margin of safety to make the investment, which makes me skeptical when I look to the future.
Introduction
Investors who chose the S&P 500 in the last 5 years made an excellent choice. American companies, especially the Magnificent 7, internationalized their businesses even more, and the S&P 500 index rose by more than 80% in the period.
However, I have some data that shows that the risk-return ratio for investment may not be as favorable as in recent years. I will list the three below.
Temporal Analysis Of Equities, Bonds And Cash
After better than expected inflation data, it seems certain that the FED has achieved a soft landing, and will be able to begin the process of cutting interest rates in September. But after all, how much appreciation can the interest rate cut bring to equities?
An interesting report from BlackRock analyzed data during the six months before the last rate hike, the pause period, and the six months after the first rate cut for each cycle since 1995.
It was concluded that, on average, equities appreciate more during pause periods, that is, the period we are currently in. However, analyzing precisely, this average return was around 22%, and we currently have the S&P 500 with an appreciation of 19% for the year.
Therefore, there is little potential for additional appreciation compared to the report, which corroborates my skeptical view and recommendation to hold the ETF. Now, let’s analyze another source with even more interesting data.
Performance Analysis In Presidential Reelections
I found the graph below even more interesting. Since 1944, when a candidate attempts re-election, the equity market rises, regardless of whether the re-election candidate wins or not.
I found the graph below even more interesting. Since 1944, when a candidate attempts re-election, the equity market rises, regardless of whether the re-election candidate wins or not.
It makes a lot of sense, given that candidates tend to use strategies to boost the economy in re-election years. However, the average return in these years was 16% in these years.
As we know, the S&P 500 is already appreciating more than the 16% mentioned, that is, there are once again signs of little margin of safety to make new purchases, which corroborates my skeptical view. Let’s go to the last piece of information that really catches my attention.
ROE And P/E Analysis
Below, we have a comparative graph of ROE versus P/E for emerging countries and the USA.
The ROE of American companies is higher than listed peers, however their P/E is around 50% higher than the peer average, which again gives evidence of little margin of safety to make the investment.
There is a rule of thumb that says the multiple for growth assets balances at 15x, and considering the 17.5x multiple, there is a 14% downside for me to raise the hold to buy recommendation.
However, I make it clear that the recommendation is only for price reasons, as I continue to believe that American assets will continue to perform well. Now, let’s look at Quant Rating and Factor Grades.
Quant Rating And Factor Grades
When we analyze Seeking Alpha’s quant tools, we see that the recommendation is to buy the asset.
In my view, this is due to the fact that the tool does not consider valuation indicators for the note, in any case, this raises an alert and makes me enter the chapter on risks for my thesis.
Potential Risks To The Thesis
When it is recommended to hold an asset, this means that those who did not buy it will not participate in the gains if the asset rises. Therefore, the first risk is that the momentum of the S&P 500 is very strong, and we can even see this through Factor Grades.
Additionally, in recent years, American assets have grown more than the global average, which has resulted in the US reaching 50% of the global stock market according to Goldman Sachs.
Finally, despite the dollar losing space to other currencies as a foreign exchange reserve, it continues to be the most prominent currency, which brings even greater strength to the American market. The risks to the thesis are diverse and investors should exercise caution before making their decision.
The Bottom Line
The resilience of the American financial market draws attention with its increasingly internationalized companies, however there are signs that the risk-return relationship may not be as attractive.
Despite the high ROE, the P/E already includes a lot of growth, and statistical data proves the thesis that there are several signs that there is little potential for additional appreciation.
Based on this analysis, I recommend holding the SPDR S&P 500 ETF Trust. In my opinion, investors should stick to the various data points that indicate little potential for further appreciation. I don’t believe the risk-return ratio is very attractive.
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