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U.S. Equity Rally’s Narrow Base Is No Problem for Evercore

U.S. Equity Rally’s Narrow Base Is No Problem for Evercore

(Bloomberg) -- The increased concentration of market returns shouldn’t worry investors, according to Evercore ISI.

Since the end of September, Apple Inc. has been responsible for about 14% of the S&P 500 Index’s net return, Evercore ISI strategists led by Dennis DeBusschere wrote in a note Sunday. Microsoft Corp. has contributed 6.7%, while Facebook Inc., Alphabet Inc. and UnitedHealth Group Inc. are around the 4% mark, they added. Some investors have said this is a risk to the overall market because if these stocks stumble, they could drag the broader gauge down.

U.S. Equity Rally’s Narrow Base Is No Problem for Evercore

But it’s actually OK, the strategists said. They cited the “extremely high” return on invested capital relative to cost of capital among the top 10 technology companies, saying that “as long as these companies remain highly profitable, which appears likely at least over the near term, we would expect them to lead the market higher.” They also noted that the tech companies are returning cash to shareholders “at a prodigious pace.”

“On a price-to-cash return (buybacks + dividends) basis, the S&P remains in the bottom 25th percentile of its historical range,” DeBusschere and his team wrote. “Global institutional investors are putting significant money to work in high cash returning U.S. stocks, which is likely to continue as long as the yields on other assets remain depressed.”

The strategists said that while traditional valuations -- notably the price-to-earnings ratio -- may seem high, they can continue to rise as long as the Federal Reserve tries to keep financial conditions supportive, inflation and bond yields are low, and growth is stable. Also, hedge-fund tech exposure is currently in the bottom 25th percentile of its historical range, they said.

“While cash returns remain elevated, particularly relative to competing assets, S&P valuations should be biased higher,” the team wrote. “The ‘pain trade’ is for continued outperformance.”

To contact the reporter on this story: Joanna Ossinger in Singapore at jossinger@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Cecile Vannucci, Margo Towie

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