06 Mar 2025
The buy low & sell high opportunity
THE CURRENT STATE
The market’s reliance on the Magnificent 7 (Mag 7) has led to historically high valuations, heightened concentration risk, and reduced return forecasts. Investors, however, continue to favor index-based investments, particularly passive U.S. large caps, buying high despite the risks. In contrast, undervalued securities exist, presenting a prime opportunity for active management to buy low and capitalize on potential growth.
THE OPPORTUNITY
The forward price-to-earnings (P/E) ratio plays an important role in determining asset class expected returns. At Frontier, P/Es are a major starting point for developing the asset allocation of our strategies. The chart below highlights the range of forward P/E ratios for various asset classes as of 12/31/2024, with the Mega Cap 8 (Magnificent 7 + Netflix) pulling up the S&P 500’s valuation. Other areas of the market have materially lower forward P/Es, offering attractive buying opportunities.
Data as of 12/31/2024. Source: Yardeni
FRONTIER’S RESPONSE
Historically, higher forward P/Es have forecasted lower future returns. The chart below illustrates S&P 500 returns for the following 10 years based on a given forward P/E. The green bar represents the S&P 500’s forward P/E as of 12/31/2024. Historically, a forward P/E of 22x has meant annualized returns in the low single digits. Conversely, lower P/E readings have led to more attractive returns. Frontier Strategies aim to capitalize on low P/E opportunities while maintaining a diversified portfolio across asset classes. Instead of chasing past performance, we actively pursue opportunities with higher expected returns.
Data as of 12/31/2024. Source: J.P. Morgan Global Insights Guide to Markets – Europe (Bottom). Past performance is no guarantee of future returns.
Past performance does not guarantee future returns. The historical performance of each index cited is provided to illustrate market trends; it does not represent the performance of a particular investment product or strategy. An index is unmanaged and not available for direct investment. Index performance does not take into account fees and expenses. Returns represent total annual returns (reinvestment of all distributions) and does not include fees and expenses. There can be no assurance that any Frontier strategy or investment will achieve its objectives or avoid substantial losses. Performance shown represents total returns that include income, realized and unrealized gains and losses. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any types of securities and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Frontier is not responsible for any trading decisions, damages or other losses resulting from this information, data, analyses, opinions or their use. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees and expenses.
Glossary of Indices. It is generally not possible to invest directly in an index therefore they do not incur frictional costs. Exposure to an asset class or trading strategy or other category represented by an index is only available through third party investable instruments (if any) based on that index.
MSCI EAFE Index: An equity index which captures large and mid cap representation across 21 developed markets countries around the world, excluding the U.S. and Canada.
MSCI Emerging Markets Index: Captures large and mid cap representation across 24 Emerging Markets (EM) countries.
S&P 500® Index: A stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States.
S&P SmallCap 600® Index: Seeks to measure the small-cap segment of the U.S. equity market.
Frontier Asset Management is a registered investment adviser with the U.S. Securities and Exchange Commission; however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Additional information about Frontier and its investment adviser representatives is available on the SEC’s website at www.adviserinfo.sec.gov.
Frontier’s ADV Brochure and Form CRS are available directly on our website www.frontieraset.com or by request, at no cost by contacting us at 307.673.5675 or info@frontierasset.com. They include important disclosures and should be read carefully.