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ROBERT ARMSTRONG: Welcome to Charts That Count. The kingdom of stocks is divided into two parts, value and growth. With value stocks, you pay a reasonable price for a slice of a company's profits. Value stocks, in a word, are cheap. In this category today, for example, we find almost all banks and many industrials. With growth, by contrast, you pay up for a slice of rapidly rising revenues or profits. In this category, we typically fund biotechnology, software, and hot retail stocks.
Now, as this chart from STAR Capital shows, you've never had to pay more for growth relative to value than you do today. Indeed, the differential in valuation was last this great or almost this great back in 1999, just before the dot-com bubble burst. And as it was two decades ago, technology is leading the way. Look at the price-to-earnings multiples of Microsoft Google, Facebook, and Amazon, compared to that of the S&P 500. There really is no comparison.
But in other ways, the story is very different today. In 1999, the tech stocks that led the market were largely speculative. Now, the leading companies have very high, almost monopoly-like profits. This chart from The Leuthold Group tells that story. Returns at the top quartile of American companies continue to rise steadily, while returns at all other companies are slowly slipping away.
The stock market has staged a remarkable rally in recent weeks and has had a fantastic decade. But ask yourself these two questions-- one, what does this extremely unequal distribution of profits say about the overall health of the American economy? And two, how long will it be before tax authorities or antitrust regulators step in to spoil the party at the most dominant companies?
