Building a portfolio is not as easy as it once was. You have a lot of IT-related stocks that have provided incredible returns if you had held on to them. Price/earnings ratios have blown out to nose-bleed territory.
What I have noticed is that a lot of the stock price increases are attributable to higher P/E ratios. So what is getting baked into the price of stocks is accelerating earnings coming from AI-related activities. I have no way of knowing how much of the market’s performance is attributable to this, but it’s not insignificant.
I you look at, for example, IBM, you see P/E expansion lifting the share price. In a few years, the P/E ratio has moved from around 10 to over 30. Expectations are very high, and it would seem that disappointments will result in some severe readjustments in the price.
Of course, it’s different now. That’s always the case when things get way out of line. But it’s been going for years
HSBC has moved from a P/E ratio of 8 to well over 20. You see this again and again and again. What’s changed at HSBC? Not much that I can see, other than lazy capital looking for places to invest and driving up P/E ratios. It’s truly frightening.
In looking at my portfolio, most of the stocks have very elevated P/E ratios, which I believe will ultimately come back to more normalized levels, and that would require a pretty significant price adjustment. I just don’t see the growth there.
