The S&P 500 has recently scaled new historic heights, a significant milestone that resonates across the U.S. stock market, mirrored by the Nasdaq 100 and the Dow Jones Industrial Average.
The achievements made by these indices raise a pivotal question: Are we witnessing an overvaluation in the U.S. stock market, or do these levels still present a fair, investable landscape?
Latest data from FactSet offers a comprehensive answer to this question.
US Stock Market: Present Valuations
The forward 12-month price-to-earnings (P/E) ratio for the S&P 500 stands at 19.5. This figure surpasses the five-year average of 18.9 and the 10-year average of 17.6, suggesting slightly higher market valuations for the cap-weighted index comprising the largest 500 U.S. stocks.
A similar pattern is evident in the Dow Jones and Nasdaq 100 indices.
The Dow, as tracked by the SPDR Dow Jones Industrial Average ETF DIA, is trading at 18.4 times its forecasted year-ahead earnings, a value that aligns with its 5-year average but is slightly higher than its 10-year benchmark of 17.1x.
Meanwhile, the Nasdaq 100’s valuations, as observed through the Invesco QQQ Trust QQQ, are at a P/E ratio of 25.9x. This level is consistent with the five-year average of 25.6x but exceeds the 10-year average of 22.9x.
Despite the slightly elevated figures above the average, the present valuations of the U.S. stock market do not significantly indicate an overvaluation concern.
The peak forward P/E ratios for the S&P 500 ETF Trust SPY and the SPDR Dow Jones Industrial Average ETF over the past decade were reached in June 2020, with the S&P 500 hitting 25x and the Dow Jones touching 24x. In contrast, the Nasdaq 100’s valuations soared even higher, reaching 33.8 times anticipated earnings in September 2020.
| Metrics | S&P 500 (SPY) | Dow Jones (DIA) | Nasdaq 100 (QQQ) |
|---|---|---|---|
| Current P/E Ratio | 19.5 | 18.4 | 25.9 |
| 5-Year Average P/E Ratio | 18.9 | 18.4 | 25.6 |
| 10-Year Average P/E Ratio | 17.6 | 17.1 | 22.9 |
| Peak P/E Ratio (Last Decade) | 25.0 | 24.0 | 33.8 |
| Peak P/E Ratio Date | June 2020 | June 2020 | September 2020 |
A sector-specific focus shows significant variation in forward P/E ratios within the S&P 500. The Information Technology and Consumer Discretionary sectors exhibit the highest forward 12-month P/E ratios, at 27.1 and 24.6, respectively. On the other end of the spectrum, the Energy and Financials sectors present the lowest ratios, at 11.0 and 14.4.
| Sector | P/E (Forward 12m) | 5-year average | 10-year average |
|---|---|---|---|
| Info. Technology | 27.1 | 23.4 | 20.0 |
| Consumer Disc. | 24.6 | 27.5 | 23.1 |
| Industrials | 19.4 | 19.6 | 18.0 |
| Consumer Staples | 19.2 | 20.0 | 19.5 |
| Materials | 18.5 | 17.5 | 16.7 |
| Health Care | 18.2 | 16.3 | 16.1 |
| Comm. Services | 17.7 | 18.7 | 15.9 |
| Real Estate | 17.3 | 19.4 | – |
| Utilities | 15.2 | 18.6 | 17.6 |
| Financials | 14.4 | 13.2 | 13.1 |
| Energy | 11.0 | 2.5 | 15.6 |
Key Takeaways:
- The S&P 500, along with the Dow Jones and the Nasdaq 100, are all simultaneously trading at their all-time highs.
- Current market valuations are slightly above historical averages but do not indicate severe overvaluation.
- Sector-specific analysis shows significant variation in P/E ratios within the S&P 500.
In conclusion, while the U.S. stock market currently stands at a marginally higher valuation than its historical averages, the extent is not drastic enough to sound alarm bells for investors.
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