We hope your new year is off to a great start. We are excited to roll out more robust insight pieces and communication to you this year. To get started, I want to share two ideas we are seeing in markets today.

1. Go long. Think longer duration income producing investments.

Since the end of August 2024, the 10-year Treasury yield vs. the 3-month Treasury Bill has seen a large shift in favor of the 10-year Treasury yield. This means investors could now be rewarded with higher yields by investing in longer maturing income investments compared to cash like assets.

Look at the chart below showing the last 10 years of the 3-month Treasury Bill yield vs. the 10-year Treasury yield. For the first seven years, all yields were low, rarely above 2.5%. Then as the Federal Reserve began the rate hiking campaign, 3-month Treasury Bill yields moved above the 10-year Treasury yield for the next 3 years. In the last 10 years, only now do we see both (1) higher ABSOLUTE long-term yields AND (2) higher long-term yields RELATIVE to short-term yields. It’s this combination of “absolute” and “relative” higher long-term yields that has grabbed our attention as an investment opportunity.

3-Month T-Bill vs. 10-Year Treasury Yield Over Last 10 Years

Source: KoyFin Inc., Board of Governors of the Federal Reserve System (US)

2. Equity valuations. Companies today vs. the past = different valuations moving forward.

Since 2010, the forward price-to-earnings ratio on the S&P 500 has increased from 13.7x to 22.8x, meaning for $1 of expected profit, you now pay $22.80 vs. $13.70 fifteen years ago. That might sound expensive on the surface. But look at WHAT you are buying in 2010 vs. 2024 by looking at the 10 largest S&P 500 companies. Common themes, in our view, from the class of 2010 would be: (1) capital intensive businesses (2) low margins (3) low growth profiles and (4) greater cyclicality.

Now compare that to what we see with the 2024 companies: (1) less capital intensive (though evolving with AI investment) (2) high margins (3) high growth profiles and (4) less cyclical.

The companies that dominate market valuations today simply command a premium, in our opinion, relative to the largest companies of the past. We naturally expect market valuations to continue to fluctuate. But we may not see 2010 type valuations when investing in 2025 type companies.

S&P 500 Next 12 Months Price-to-Earnings Ratio (12/31/2010 – 1/3/2025)

Source: KoyFin Inc., S&P Capital IQ

Ten Largest Companies in the S&P 500 (2010 vs. 2024)

Sources: Visual Capitalist, Statista, Data is Beautiful, RIAA, IFPI, Goldman Sachs Global Investment Research

We look forward to seeing you soon and sharing more insights this year.

If you or someone you know have questions about the current investing landscape, please contact us today at (615) 370-1253.

Past performance is no guarantee of future results. All investing involves risk, including the possibility for loss. Indies are presented herein for illustrative purposes only. Indices are not managed, assuming reinvestment of income, do not reflect the impact of any trading costs or management fees, and have limitations when used for comparison purposes. It is not possible to invest directly into an index. This communication is for educational purposes only. It is neither an offer to sell nor a solicitation of an offer to buy any securities, investment products, or investment advisory services. The information contained herein is from sources believed to be reliable but cannot be guaranteed.