If you look at the first quarter, you will see that the S&P was up 7%. And of the gain in the S&P, the 20 biggest stocks accounted for an increase of $2.1 Trillion in net worth of the S&P. If you look at the other 480 stocks in the S&P, they have contribute a gain of not $2.1 Trillion but in aggregate gain of a mere $170 Billion. So the gains in the market have been compressed into a handful of companies, and these handful of companies have among the worst earnings trajectories, and in a lot of cases, they've been reporting negative earnings growth.
So the hallmark of top-performing stocks is profits growth. It has nothing to do with P/Es – and one of the arguments today against the stock market is that the P/E for the stock market has gone up and the stock market is selling at a historically high P/E of 21-22 times. Now, the flies in the ointment here is that we have entered an era of permanently high P/Es in the stock market because of the impact of technology not only on the economy and the business landscape but also on the stock market.
Was 2008 a good year or a bad year for the stock market? Profits dropped 40% in 2008. When profits drop, the P/E expands exponentially and the highest P/E in the stock market is when corporate profits are at their worst. So, the other fly in the ointment about this observation about a high P/E, corporate profits right now are trending down, which means that all things being equal, the market is staying the same and going nowhere - the P/E has to go only one direction and that’s up.
Every one of these ratios, which is widely used, is a snapshot in time. And all you need to know about these ratios:
All these ratios are subservient to profits growth rate. And most of the world doesn't know this, 80% of the world wants to rely on P/E but it's the wrong metric.