From Nasdaq:

As the S&P 500 reaches new heights, its valuation has also gone up. The index’s forward price-to-earnings ratio rose to 20.4 times, last seen in February 2022. It is now significantly higher than the index’s historic average of 15.7.

Despite recent record highs, some investors are wary of the S&P 500 due to its high valuation. Chief of investment research at Nationwide, Mark Hackett, believes buying at 15 times activation is much more attractive than at the current valuation of 20 times.

Stock valuations continue to rise as Treasury yields rebound. Yields pressure equity valuation, but stock valuations could rise further if the Fed cuts interest rates. The 10-year Treasury yield was last around 4.16%.

The earnings outlook is vital for reducing expensive valuations. But profit expectations for 2024 have stayed stable this earnings season, as companies have reported results. S&P 500 companies are expected to increase earnings by 9.7% this year.

High valuations have resulted in below-average performance in the past. The S&P 500 has been flat on average over the next year when it traded at its current valuation of 22 times its trailing twelve-month earnings.

Heavy weighting of the index’s largest stocks has skewed the S&P 500’s valuation. Combined, these megacap stocks have a combined weighting of 29% in the index and trade at an average of 34 times earnings.

The S&P 500 is “overvalued” by more than 5%, according to Ned Davis Research. However, the index is “far from bubble territory,” the firm said.



Read more: ANALYSIS-As S&P 500 breaches 5,000, its valuation hits lofty levels as well