Dialogue. S&P 500 Valuation Concerns, Intuit & CSU Earnings, Sea and Meli Update

**Alex** (0:05)
Welcome to The Synopsis, a business and investing podcast.
I am joined by none other than the Drew Cohen of Drew Cohen Money. How are we doing over there, Drew? I know, again, you are on another four-week saga to replace me, but back by popular demand, and by that, I mean one comment who said they missed me. I mean, it's overwhelming, I'm back. So, you know, I get where you were coming from, but it can't be done, Drew.

**Drew Cohen** (0:30)
And it's true, it's true. We did get that one comment coming through, and since Alex isn't on Twitter, it was very quick to message that to him, and it usually ignores my text, but, you know, for some reason, he replied to that one pretty quickly.

**Alex** (0:43)
I mean, nothing makes me stop like I'm doing to, you know, recognize my fan, so I appreciate you out there.

**Drew Cohen** (0:49)
That's right, he's got a big fan base.

**Alex** (0:53)
And today we have, again, I keep, I was just talking to Drew offline about this, where I was like, Drew, let's do, he had such a great, I want to call it, wealth management, investment management video that just laid everything out so well. And I was like, let's do that. And he's like, no, why don't we talk about software companies and their impact on AI for the fourth time in a row? He goes, the people love it. And I go, here we are again. He is pigeon-holding me into talking about Intuit, Axon, Constellation Software, everything that is gonna bring up our AI software discussion and what side of the fence we are on and whether we are going to be wrong or not. But here we are again.

**Drew Cohen** (1:34)
So let's do it. The people, they just want the hits. You try to push out new content and they are not that interested. They just want you to play that same old song.

**Alex** (1:42)
Yeah, play the hits. I get that. No, I am with you. And the hits keep evolving. They keep getting interesting. Before we get into that though, I thought you put out a pretty interesting video, which some could argue it was a macro video. I don't know. It was an interesting video about you talking about the S&P 500 concentration to where historically it's been the average multiple it's trading at. Even Oswalt puts in his implied equity risk premium.
A bunch of indicators demonstrating that, obviously, earnings need to grow pretty quickly from here, or historically, these companies are at all time high multiples and things of that nature. Of course, this time could be different. We're in the AI world. These companies could be structurally better than they've ever been historically, which of course is the argument.
Going back to the big tech and the S&P 500's historic multiple being higher for a very long period of time because arguably, I think Google does deserve a higher multiple than probably the old world companies that were in the top 10 of the S&P in the early 2000s, late 90s, obviously, differently structured companies. There's an argument to be made there, but Drew, what was your takeaway from that research you did and that post you put out?

**Drew Cohen** (2:57)
Yeah, so one kind of key point is that I don't believe the index concentration in and of itself is the key risk. I think it's the corresponding high valuations that tend to come alongside that concentration that's the risk. And so if you're looking at the top 10 companies, they're 40% of the S&P 500, roughly speaking, and that's almost double what it is historically. But the reason why that is is because they have all grown in valuation and market caps at the same time to then become a larger portion of the market cap weighted index. And so if you want to ask, what is the real risk? It's, in my opinion, less of the concentration in and of itself and more the actual fact that valuations are elevated versus history. We're looking at a 4 times 21 times multiple for the S&P 500 And that's about one and a half standard deviations where it is historically. And there's all sorts of different data on what that means for future expected returns. You know, there's one JP Morgan report that says the return is usually under 5 percent, looking forward for the next five years or 10 years at that multiple. And so that's less than the historical 9, 10 percent that we usually talk about. And there's some figures where it's even much lower. And so that's kind of the real risk. The concentration risk, yeah, it's true when you're buying the S&P 500 You know, you want to buy this big diversified basket of stocks. And OK, you kind of didn't think you're really buying 40 percent into 10 stocks. Having said that, these businesses are more diversified than most businesses are, right? You know, you pick Google, for example, you have GCP, you have Search, you have Waymo, you have YouTube. That's a lot of different kind of business engines. It's not really just one end market that is the risk there. Even if, you know, you pick Tesla, well, maybe not the best example because they're mostly producing cars and less of them right now.