September 30, 2024
I wrote about stock extreme market valuations last week . Valuations have been shockingly high and seem to keep rising. However, that’s the nature of bull and bear runs – they’re often higher and lower than most people think possible. It seems the current excess has one primary culprit. You can probably guess which sector it is, but here’s the full breakdown of S&P 500 price-to-earnings ratios by sector for perspective:
The table shows how the tech sector has been driving the market froth, which isn’t news to those who’ve paid even a little attention to stocks. But there are also some other noteworthy pieces of information on that table.
First, the S&P 500 is 26% above its historical valuation. That doesn’t mean it’s going to drop 26% though. Earnings can go up. Historical averages can rise. And the overvalued status can remain for longer than expected.
Next, some relative valuations are worth exploring. For instance, the energy sector is deeply undervalued relative to its historical averages, the utilities sector is in line with history, and technology stocks are 56% above the historical average. Other overvalued sectors include communications, staples, and financials, though they’re not inflated by a lot. So, the market is overvalued, but it’s almost entirely due to tech, while other sectors are in line with history.
Lastly, adjusting the S&P 500 to its current valuation shows how tech is really the only overvalued sector, while many others are undervalued (three right-most columns in the table). If there’s a severe downturn, this probably won’t matter. That said, the adjusted ratios suggest there could be bargains in certain non-tech sectors for interested investors.