- The S&P 500 is currently overvalued by 20%, according to Jack Ablin, CIO at Cresset Capital Management.
- Ablin’s calculations are based on a comparison between the yield on BBB-rated corporate bonds and the S&P 500’s forward earnings yield.
- Despite this, Ablin advises investors not to sell all their S&P 500 stocks as the overvaluation is largely due to a few high-quality megacap technology companies.
Concerns rise over the S&P 500’s overvaluation, with calculations suggesting a 20% crash may be required for fair pricing. However, experts advise caution rather than panic.
Overvaluation of the S&P 500
Jack Ablin, chief investment officer at Cresset Capital Management, has raised concerns over the current valuation of the S&P 500. According to his calculations, the index is overvalued by 20%, a figure that suggests a significant market correction may be on the horizon. Ablin’s assessment is based on a comparison between the yield on BBB-rated corporate bonds and the S&P 500’s forward earnings yield, which currently sits at 4.8% based on expected 2024 profit. In contrast, the yield on 10-year BBB corporate bonds is 5.9%, indicating that the S&P 500 would need to fall by 20% to offer a comparable return.
Not All Doom and Gloom
Despite the alarming figures, Ablin is not advising investors to sell all their S&P 500 stocks. He attributes much of the overvaluation to high premiums paid for a select group of high-quality megacap technology companies, including Nvidia (NVDA), Microsoft (MSFT), Apple (AAPL), Amazon.com (AMZN), and Meta Platforms (META). Most other S&P 500 stocks, he says, have seen their valuations rise in line with their earnings and dividends since 2010, and their valuations remain reasonable. Ablin also reminds investors that valuation alone is not a reason to sell, as expensive stocks can become even more expensive. “Valuation is not a timing tool,” he explains. “Valuation is only one metric in a mosaic that we continuously track to gauge the market, which also includes the economic backdrop, liquidity, psychology and momentum.”
Most Expensive S&P 500 Stocks
Companies with the highest forward P-E ratios include Digital Realty Trust (DLR), CoStar Group (CSGP), Boeing (BA), UDR (UDR), and Illumina (ILMN). These companies, along with others like Axon Enterprise (AXON), Welltower (WELL), Dexcom (DXCM), Camden Property (CPT), and Tesla (TSLA), have significantly high forward P-E ratios, contributing to the overall overvaluation of the S&P 500.
Conclusion
While the S&P 500’s overvaluation is a concern, it’s important for investors to consider all market factors before making drastic decisions. Overvaluation is largely due to a small group of high-performing tech stocks, and most other S&P 500 stocks remain reasonably valued. As always, investors should keep a close eye on the market and make informed decisions based on a variety of metrics, not just valuation.
