Stocks have literally never been this expensive
The S&P 500 has clinched 20 record highs this year. It also means stocks are relatively expensive.
By John Towfighi, CNN
New York (CNN) — The S&P 500 has soared nearly 30% since its low point in April and investors have cheered the index’s ascent to record highs. The market’s rally also means stocks are relatively expensive — and more vulnerable to a surprise.
Stocks had a shaky start to September as investors entered a historically poor month for the market while concerns linger about President Donald Trump’s feud with the Federal Reserve and legal uncertainty enveloping his tariff regime.
The Dow, S&P 500 and tech-heavy Nasdaq slid on Tuesday as investors grappled with the bevy of uncertainty. The Dow was down 335 points, or 0.74%. The broader S&P 500 fell 1% and the tech-heavy Nasdaq Composite slid 1.2%.
Stocks are coming off an impressive run: The Dow and S&P 500 just recorded four consecutive months of gains. The S&P 500 has notched 20 record highs this year, and the blue-chip Dow in August hit its first record high since December.
But that rally didn’t come without fresh caveats: according to some metrics, US stocks have literally never been this expensive — even during the dot-com boom. The S&P 500 on Thursday traded at 3.23 times sales, that metric’s highest level ever, according to FactSet data. It’s one signal that stocks might be overpriced, and more sensitive to a shift in sentiment.
“On the face of it, the US market is expensive. There are no two ways about it,” Arun Sai, senior multi-asset strategist at Pictet Asset Management, said.
Legendary investor Warren Buffett’s favorite market indicator, which compares a measure of the total value of the US stock market to the value of US economic growth, is also flashing a warning sign. The Buffett Indicator is at 217%, a historically high level that signals the stock market might be strongly overvalued.
Not all metrics indicate record high valuations. The S&P 500’s forward price to earnings ratio, a popular measure of valuation, is elevated but not at all-time highs.
“By most widely used measures, US equities look highly valued relative to the rest of the world,” James Reilly, senior markets economist at Capital Economics, said in an August 28 note. “But there is a difference between highly valued and overvalued.”
“While it may appear that investors are paying a premium for US stocks, they may just be paying for superior long-run growth,” Reilly said.
Meanwhile, investors who buy the S&P 500 are increasingly betting on the success of a few, enormous companies.
The Magnificent Seven tech stocks — Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Meta (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA) — as of last week accounted for 33.5% of the S&P 500’s total market value, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
Nvidia itself accounts for about 8% of the S&P 500’s market value. Tech’s monster gains have helped fuel the market’s rally. But as the market relies more on fewer companies and becomes more concentrated, it leaves investors less diversified and more exposed to a few companies’ fates.
Each of the Mag Seven stocks were lower on Tuesday. Nvidia fell 2.8%, dragging the market lower.
“There was a huge rally, so therefore expectations are, by definition, very high,” said Jay Hatfield, chief executive at Infrastructure Capital Advisors. “If you don’t substantially beat expectations, you’re going to roll over.”
It was a strong summer for stocks. Now investors are looking ahead to the fall. Wall Street’s fear gauge, the CBOE Volatility Index, surged 20% on Tuesday as jitters crept back onto Wall Street.
The S&P 500 has declined in September in six of the past 10 years, according to UBS.
Meanwhile, Treasury yields jumped higher on Tuesday, with the 30-year yield touching 4.98%, its highest level in over a month. After a quiet summer in the bond market, investors sold long-dated government bonds as concerns linger about debt burdens.
A widespread risk-off sentiment put pressure on markets to start the month. Higher bond yields can also pull investors away from riskier assets like stocks, contributing to the potentially shaky ground this week for US stocks.
“The market reaction to President Trump’s effort to fire Fed governor Cook for cause based on allegations of mortgage misrepresentation to date has been very muted considering that it accelerates and intensifies the threat to Fed independence,” Krishna Guha, vice chairman at Evercore ISI, said in a note. “We think the market has not properly priced in the transition ahead.”
Gold, a haven during uncertainty, surged 2.15% and hit a record high Tuesday. The yellow metal has soared 35% this year as central banks have expanded reserves of bullion and investors have flocked to safe haven investments. Gold prices can also rise when the Fed is expected to lower interest rates, and bullion has been boosted by increased Fed rate cut bets.
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