Quick Bites | Are US shares expensive?

It often pays to “look under the bonnet,” to get beyond the headline number. A great example is the US share market’s Price Earnings ratio (the PE). Most will know that the long-term average valuation of the US market in PE terms for the key S&P 500 index is around 16x prospective earnings. But is that a particularly useful metric to use at the moment? Perhaps not.

Source: Ed Yardeni

The chart above shows that while the S&P 500 as a whole is at 18x (about 10-15% more expensive than average), the “MegaCap 8” are at almost 30x, and the index excluding the MegaCap 8 is at only 15.6x.

The MegaCap 8 are Alphabet, Amazon, Apple, Meta, Microsoft, Netflix, Nvidia, and Tesla. Their market cap has risen by 58% from this year’s low of $6.8 trillion on January 5 to $10.7 trillion in early June. Together, these eight stocks now account for a record 26% of the market cap of the S&P 500.

The bull market in US stocks which began last October is being pulled forward by these Big Tech names, and they are starting to look overbought and very pricey. Narrow market breadth is not an especially healthy sign. But the non-Tech names look reasonably priced – particularly if we are close to a peak in official interest rates and the much-heralded “imminent recession” doesn’t arrive. Of course, that’s a big “IF”.

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