Do valuations matter? 

The forward price-to-earnings (PE) ratio is a valuation metric that compares a company's current stock price to its expected earnings per share (EPS) over the next 12 months. It is used as a measure of value to assess whether a stock is overvalued or undervalued relative to its future earnings potential - the higher the ratio, the more overvalued the share. 

The graph below shows the forward PE of the S&P500 over many years, and what the subsequent 1-year return was.  You can see a higher concentration of dots in the top left corner of the graph.  This means you are more likely to see higher 1-year returns (Y-axis) when the valuations or forward PE ratios are lower (X-axis). 

The green bar shows where the S&P500 forward PE is currently (>20x), which is high or overvalued.  So, what are we likely to expect this year?


Source:  JP Morgan Guide to the Markets, Bloomberg


The recent dominance of the Magnificent Seven stocks in driving market valuations.  This sector is led by Amazon, Meta, Microsoft, and Nvidia, who are collectively referred to as the 'Fab-4. They accounted for nearly 75% of the S&P 500’s return in the past 12 months.  The high forward PE valuations for the S&P 500 are also driven mostly by these 4 shares.   

Such levels of market concentration have been observed on only a handful of occasions in the past five decades: the energy boom of the early 1970s, the consumer stocks in the early to mid-1980s, the technology shares in the early 2000s, and the banking stocks in 2007 and 2008.

I was reminded of a quote this week by famous billionaire investor George Soros that said, “Market concentration is not always a sign of strength; it can also be a precursor to vulnerability.”  If the graph is any indication of what to expect, it's likely to affect this concentrated part of the market more than the rest of the market. 



Chris Davis is a respected investment professional who sits on the board of Berkshire Hathaway and The Coca-Cola Company.  Chris comes from a very wealthy family, but interestingly, Chris, his father and his grandfather all obtained their immense wealth independently. 

In our profession, its often said that the third generation is cursed and that many wealthy families lose their wealth by the third generation.  I think this is a bit of a generalisation; however, there is some truth in it. We have seen many families navigate the challenges of preserving and growing generational wealth at Foundation.  So, what made Chris Davis’s family buck the trend? 

In this podcast, Davis shares some great life and investment lessons that he learned from his father and grandfather.  It's striking how different each generation was, but their lessons remain valid even in today’s modern world. 



If you enjoyed books like Thinking Fast and Slow by Daniel Kahneman or Think Again by Adam Grant, you will enjoy this interesting new study by Cass R. Sunstein and Tali Sharot about the power of habituation:  Look Again:  The power of noticing what was always there.

To ‘habituate’ means to become accustomed or desensitised to something through repeated exposure. It's the process of developing a habit or becoming used to something.  For example, if you move to a noisy street, you might initially find the sound of traffic very disruptive. However, over time, you habituate to these noises, meaning they no longer bother you as much as they did at first. 

I learnt that it’s easier for us to habituate to physical things than to experiences. I also learnt that we need to find new ways of seeing things, so that we can appreciate the good. 



A new section in which I invite you to take a moment and think about a question I may pose or thought I may share.

What do you fear most?  Running out of money or wasting your life?



We spent the Easter weekend in Dullstroom, in awe of the changing colours surrounding us.  The trees and late sunrises were a stark reminder that autumn is here. 

With the cooler weather, I crave a red wine.  Something savoury and comforting but still light.  This month’s wine is David & Nadia Sadie’s Grenache Noir.  It’s a brilliant wine, with notes of berries and tobacco.  The perfect autumn wine.


I hope you enjoyed this month’s edition.  

Stay curious,

Elke Zeki