S&P forward P/E ratios: top 10 stocks vs. full index
Source: FS Investments, Bloomberg Finance, L.P., as of June 29, 2023. Bloomberg Finance, L.P., as of June 22, 2023.
- Halfway through 2023, markets have been almost entirely in a risk-on mode as economic data has gained steam and investor sentiment has improved along with it. The S&P is up approximately 15% year to date.1
- The rally may be cause for potential concern given its extraordinarily narrow nature. As the S&P has become more concentrated, for example, its returns have been increasingly derived from its largest names.
- In fact, more than 85% of gains in the S&P 500 YTD can be attributed to seven of the largest stocks in the index.1 Absent these megacap, mostly tech names, the index would be nearly flat year to date.
- The S&P’s top names (AAPL, MSFT, NVDA, etc…) are all well-known and profitable companies—together, they contribute about a quarter of the index’s earnings. That they are fundamentally healthy, however, does not mean they are attractively priced. As the chart shows, valuations for the top ten stocks (based on forward price-earnings ratios) in the S&P are extraordinarily stretched relative to the rest of the market.1
- Against this backdrop, investors might consider today’s (richly valued and heavily concentrated) bull market a good opportunity to begin de-risking their portfolios, whether to more attractively priced international markets or less correlated or alternative source of return.