In the event of a major stock market correction, Microsoft shares have the potential for a greater fall than those of Alphabet.
Janet Yellen’s testimony before the U.S. Congress has partly revived optimism in the stock market, but, in my opinion, the situation is still far from “stable growth.”
The changing attitude of the European Central Bank and the Bank of England toward monetary policy and their readiness to tighten it potentially threaten with a decline in the market liquidity creates a risk of a correction.
In whatever light we view it, the stock market is currently at its historic highs, which is definitely exacerbating the situation.
For example, the current ratio between the stock market capitalization and the GDP of G7 member states is deviating from its 25-year average by 1½ standard deviation and almost reaches the maximum edge of the historic range of deviations:
Or here’s another interesting perspective of the market. The required number of hours of work to buy the S&P 500 is now the highest over the past 70 years and coincides with that of the year 2000 before the start of the recession:
In general, I am not thrilled with the current revival in the market, therefore, I’m asking myself: If a hypothetical investor has to choose between Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT), which one should he remove from his portfolio in the event of a market correction?
As the first step, I compared the key multiples of both companies with those of their direct competitors. To my surprise, the result was quite straightforward.
On the one hand, Alphabet demonstrated a steady potential for growth of capitalization by at least 11%. The values of all the company’s selected multiples were below the average level of its competitors.
The result of Microsoft has proved to be precisely the opposite. All analyzed multiples exceed the average level of the competitors, assuming the overvaluation of the stock price.