Talk is Cheap – Stocks Aren’t

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Kerr Financial Group

Kildare Asset Mgt.

Jeffrey J. Kerr, CFA

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March 24, 2025 – DJIA = 41,985 – S&P 500 = 5,667 – Nasdaq = 17,784

Talk is Cheap – Stocks Aren’t

 

On Monday (March 24th), Barron’s had an article with the following –

One upside is that the Magnificent Seven are “cheaper” than they’ve been for years: The premium of the group compared with the S&P 500 is at its lowest point since 2017.

While value is in the eye of the beholder and cheapness can be a relative term, the current market valuations, especially for the Magnificent Seven, are not bargains.  Here is a table from Apollo Global Management of the top 10 S&P 500 stocks with their price-to-earnings ratio using both the reported earnings and the next twelve months’ estimated earnings.

 

As you can see, the valuation of the market is heavily skewed by the largest companies.  The P/Es of the top 4 and top 10 companies are 41% and 79% respectively higher than the S&P 500 (trailing P/E calculation).  This is partially a function of the stock market concentration at historically high levels.

This overvalued condition isn’t a sudden development.  The U.S. stock market has been overpriced for years.  Here is a long-term (55 years) chart of P/Es for the S&P 500.  Before the Dot Com bubble, a P/E above 20 for the S&P was very rare.  The market P/E in the last 25 years has spent a lot of time above 20.  To put this in historic context, the median for the over 100-year history of the S&P 500 is 15.

 

 

 

In a world where most of the investing is done without human input, valuations can be irrelevant.  Today’s algorithmic/computerized/passive trading environment is an example.  Such things as valuation, margins, and cash flows are not prominent in algos trading.

Once a correction or downtrend starts, however, such fundamentals can add fuel to the decline.  This is especially the case when there is a risk of an economic slowdown or recession as we are currently facing.

Obviously, there are countless other factors influencing the markets.  Inflation, tariffs, interest rates, geopolitical events, and Fed decisions are examples.  But in the existing financial market turmoil and system wide transition to new policies, the historic stock market overvaluation might become a larger issue. Unfortunately, this adds to the list of risks facing the markets.