It's not just air

This year has been a happy one for investment portfolios. Not only are stocks, on average, more than 15% up so far in 2024 and fixed income also up between 3% and 6% (all performance in dollars), but the exchange rate is almost 10% above the start of the year.

So far so good. However, skeptics are beginning to wonder how much of the performance is “speculative” or “just air” inflating a balloon that won't take long to burst.

As of the end of October, the S&P 500 showed a 21% gain. Of that return, around 1.2% is explained by dividends paid by the companies that make up the index. More than 10% is growth in their earnings and a little under 9% is “multiple expansion”—a greater willingness of investors to pay for the same level of generated earnings. That is, more than half of what we've seen in 2024 is just extra value generated by companies, beyond expectations.

It's true, today the market is more than 1 standard deviation above its long-term average in terms of valuations, which is typically associated with lower future returns. That said, the indices today contain a greater proportion of high-growth companies, which normally trade at higher multiples.

All in all, it's undeniable that today we have a “bigger balloon” and it's not just air.

This column was originally published in the newspaper La Segunda on November 7, 2024 [LINK]