The S&P 500 has surged more than 30% from this year’s low on April 8. — Reuters
NEW YORK: US stocks are screamingly expensive when viewed from a historical perspective. But dig into the details, and the sky-high valuations may well be warranted, say strategists at Bank of America Corp (BofA).
The S&P 500 Index is trading at statistically rich levels based on 19 of 20 in-house metrics tracked by BofA, with four hitting all-time highs, a team led by Savita Subramanian said Wednesday in a note to clients.
Yet the attributes inherent in the current mix of components – including less financial leverage, lower earnings volatility, increased efficiency and more stable margins than in decades past – help to support the towering valuations, she argued.
The analysis is a counterweight to those on Wall Street who liken today’s stretched multiples with the dot-com bubble that burst at the turn of the century, and who warn that a potential repeat is in the making.
“The index has changed significantly from the 1980s, 1990s and 2000s,” Subramanian, BofA’s head of equity and quantitative strategy, wrote. “Perhaps we should anchor to today’s multiples as the new normal rather than expecting mean reversion to a bygone era.”
The S&P 500 has surged more than 30% from this year’s low on April 8 even as risks loom around president Donald Trump’s tariffs and their potential impact on growth and inflation.
And it’s been a steady climb: The benchmark index has posted 108 sessions without a drop of at least 2% – its longest stretch since July 2024.
This week, the S&P 500’s 12-month forward price-earnings ratio touched a high of 22.9, a level that this century was exceeded in just two prior instances: the dot-com bust and the pandemic rally in the summer of 2020 when the US Federal Reserve (Fed) reduced interest rates to near zero.
Fed chair Jerome Powell noted in a speech Tuesday that by many measures, equity prices are “fairly highly valued”.
BofA itself pointed out that the S&P 500 has never been costlier based on readings such as its market value relative to US gross domestic product (GDP), or various price-earnings measures.
But that doesn’t tell the whole story, Subramanian wrote in the report.
Today’s index has a higher-quality makeup than prior decades, and may be better set up for success against a backdrop of Fed interest-rate cuts.
“Buying stocks at these multiples feels bad,” Subramanian wrote, but a boom in sales, earnings and GDP would “resolve this seemingly untenable situation” by justifying those pricey levels, she added.
“With major regions in easy fiscal mode, and with the Fed cutting against a backdrop of broadening and accelerating profits, it’s not hard to argue” for such a boom, Subramanian said.
“This is the higher probability ‘tail’ in 2026 than stagflation or recession, in our view,” she added. — Bloomberg
