US Stocks may be breaking new ground, but with every fresh high, the chorus of people asking “are stocks overvalued?” gets a little bit louder.
According to the Wall Street Journal, the S&P 500 now trades at about 22.5× projected earnings for the next year, well above the three-decade average of 17.1×, and inching closer to the dot-com peak of over 25× in 1999.
Sherwood News
Things look even more stretched on a price-to-sales basis: the index is now at a record 3.2× forward revenue — meaning investors are paying more than ever for every dollar of sales the S&P 500 companies are expected to generate over the coming 12 months.
All eggs in tech
In fact, the split between the two ratios shows a deeper issue in today’s market: its reliance on Big Tech. The 10 largest companies of S&P 500 now make up nearly 40% of the index’s total value, and most of them are mega-profitable, mega-cap tech stocks — their tasty margins keeping a lid on the P/E ratio.
Nvidia, for example, has an operating profit margin near 60%, and it alone represents more than 7% of the index — dominating the S&P 500 more than any company has for 44 years. Back in 1990, by contrast, the top 10 companies were less dominant and came from a more varied mix of sectors, including names like Exxon, IBM, Walmart, and Coca-Cola.
Put simply: stocks are undeniably expensive, whether measured on profits or sales. Whether you think that’s a problem depends a lot on whether you think the BATMMAAN stocks are about to collectively stumble.