Quick Bite – Is the S&P500 expensive?
Last week, Paul Zwi’s Quick Bite explored ASX valuations. In this edition, Paul has invited me to compare the ASX with the U.S. benchmark, the S&P 500.
Stock market valuations can be highly volatile, swinging from extreme pessimism, as seen during the 2008 Global Financial Crisis, to exuberant highs, like the 2000 Dot-com bubble or the 2020 COVID surge. Currently, the S&P 500 appears expensive, with its price-to-earnings (P/E) ratio matching levels seen during the COVID bubble and approaching those of the Dot-com peak.
Source: FactSet
However, this overlooks a significant shift in the S&P 500’s composition over the past two decades. In 2005, the IT sector made up about 20% of the index. Strong and consistent earnings growth has since increased its share to roughly one-third. Technology stocks, with their higher growth rates, typically command higher valuation multiples, naturally elevating the overall market P/E over time.
While the IT sector is not a bargain given that its current P/E ratio is comparable to its COVID bubble levels, however, it remains half that of the Dot-com bubble peak.
Source: FactSet
When including tech-related companies outside the IT sector—such as Amazon in Consumer Discretionary and Alphabet and Meta in Communication Services—tech-related stocks account for nearly half of the S&P 500. These stocks appear undervalued relative to the index. For instance, Amazon’s P/E matches its 2008 GFC low, while the Communication Services sector’s P/E is below its 2020 COVID bubble levels.
Source: FactSet
In summary, the S&P 500’s rising P/E multiple reflects a shift toward high-growth companies, particularly in technology, which now dominate nearly half the index. This focus on growth has driven the U.S. market’s outperformance over the past decade and positions it well for future gains.
Note: this QB is not meant to be a recommendation. “All forecasts are wrong, but some may be useful”. Hopefully some of these insights assist you in your own deliberations – or better still, with the advice of a specialist investment adviser.