The US stock market has recovered substantially in the last two months after the initial drop caused by Trump’s tariff policies. S&P 500 is currently about 20% higher than its low in April.
Savita Subramaniam, a Bank of America analyst, says that following the recent rally the benchmark index appears “statistically costly relative to its history” on 20 of the metrics of valuation we track.
She added that the S&P 500 currently trades at 21 times its projected earnings for 2025 – which is 35% higher than its historic average.
Investors should be worried about US stock?
The equity and Quant strategist, however, isn’t particularly worried despite stretched valuation. She argues in her research that comparing the benchmark index of today with its historic self could be even misleading.
Subramaniam said that the S&P 500’s composition has significantly changed over the last few decades.
As an example, industrial and manufacturing firms with a high asset base, who once dominated this index (almost 70% in 1980), only represent 20% today.
S&P 500 is characterized by companies with leaner balance sheets and lower debt. Profit margins are higher, as well.
Subramaniam believes that these structural changes justify a multiple higher than previous generations of the Index might have justified.
She added that “the quality of earnings is better today,” citing lower volatility in earnings and stronger generation of free cash flows among U.S. companies.
Are US stocks worth a premium really?
In its latest research, Bank of America argues that the S&P 500 is currently valued higher than other global markets.
Savita Subramaniam says that US stocks are “statistically better” than those in Asia and Europe. They have a projected growth twice as high, a higher cash flow to share ratio, and less non-earning firms.
The U.S.’s energy independence and the role of the dollar as the global reserve currency are also factors that she believes support the current market valuation.
BofA has a preference for communication services, utilities and technology. This is in line with the company’s belief that growth and quality will be rewarded as a cycle matures.
The investment firm believes that while the valuations are redder than normal, they may not be the whole story. They believe higher quality could warrant higher prices.
Citi, the most recent Wall Street shop to raise its year-end target for the S&P 500 Index in the last few weeks, now expects that the benchmark index will reach the 6,300 level by 2025. This would indicate an additional 8% in potential growth from the current levels.
The first time ICD published the article S&P 500 expensive by all valuation measures, but do not worry – strategists say appeared on ICD
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