Some investors are concerned that the economy has seen its fastest growth for the postpandemic expansion.
NYSEThe stock market as a whole might look expensive, but there is value to be found in the majority of names in the S&P 500.
The index, in which stocks with bigger market capitalizations have more weight than smaller ones, is trading at 21.4 times the aggregate forecast earnings per share of the companies included. That is 43% above the long-term average of 15 times.
Removing the influence of market cap by weighting each stock on the S&P 500 equally puts things in perspective. The average valuation for stocks in the index is 19 times forecast earnings, down from a 2021 high of 21 times, according to data from Morgan Stanley. That decline has come as stocks in economically sensitive sectors like energy, manufacturing, and financials have sold off recently.
Investors are concerned that the U.S. economy has already seen its fastest growth for the current postpandemic expansion. “Drawdowns under the surface — particularly in cyclical …sectors have been fairly severe despite more modest drawdowns at the benchmark level,” wrote Mike Wilson, chief U.S. equity strategist at Morgan Stanley.
Prices for a few big tech stocks— Facebook (ticker: FB), Apple (AAPL), Amazon.com (AMZN), Netflix (NFLX), Alphabet (GOOGL) and Microsoft (MSFT)—are why the standard, market cap-weighted S&P 500 appears so expensive. Those six companies, with a combined market value of $9.4 trillion, account for a quarter of the index’s aggregate value.
They have outperformed the index recently, with an average gain of 4.9% in the past month. The S&P 500 is up 2.6% over that time.
The bottom line is that investors who are confident in the economy are likely to be able to find value beneath the surface of the S&P 500.
Write to jacob.sonenshine@barrons.com
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July 28, 2021 at 06:21PM
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The Stock Market Is Ridiculously Expensive. The Average Stock Isn't. - Barron's
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