S&P 500: Bubble or Bearish? A Market Analysis

The recent developments in the S&P 500 have further fueled concerns about a potential bubble. Although the index has been celebrating new records relentlessly, critics are casting a watchful eye on the soaring valuations, increasingly cited as a warning signal. The technology sector is at the center of this discussion, as merely five mega-tech companies currently account for half of this year's 12% gains. However, a closer look reveals that the profits of these tech giants are actually outpacing their price growth. In contrast, the rest of the market is becoming increasingly overvalued, according to Seaport Research Partners. S&P 500 companies, excluding the technology sector, recorded a 13% increase last year, while their profits only grew by 6.4%. In contrast, the information technology index rose by 27%, which, relative to the profit growth of 26.9%, seems almost modest. However, the stellar results of the tech industry mask turbulent waters in other market segments. For example, the materials sector, mainly comprising chemical manufacturers and mining operators, climbed by 9%, even though profits fell by 13%. Dow, the most expensive company in the S&P 500, remains a striking example, trading at an impressive 914 times its earnings. Tech heavyweights like Oracle and Broadcom appear quite concerning with their high price-earnings ratios of 67 and 86, respectively. However, the P/E ratio of the "Magnificent 7," which includes Nvidia, Microsoft, Meta, and Alphabet, drops by 7.9% while their stocks rise by 18%, with part of their valuations justified by the forecasted profit growth of 20% next year. Outside the technology sector, the market shows a more speculative behavior with price developments that do not keep pace with profit growth. Sectors such as industrials and consumer discretionary report increases in P/E ratios of 17% and 15%, with far lower profit gains. Nonetheless, the concerns regarding overall and specific tech valuations are justified. Since the low point of the bear market in 2022, the S&P 500 has increased by 83%, while profits have only climbed by 16%. That valuations have risen is therefore hardly surprising. According to Ed Clissold of Ned Davis Research, high valuations are not confined to the technology sector. Even without the mega-caps, the average stock price remains high, and even the cheapest stocks are expensive at present.