In the current state of the stock market, investors argue over whether valuations are too high. Some see historical indicators as signs of doom, while others feel that future earnings will justify prices. One interesting metric to look at is the forward price-to-earnings (P/E) ratio of the overall S&P 500 Index. According to Yardeni Research, the figure sits at 22x. It is elevated when looking back over the past 25 years. It only reached similar levels in 2021 and leading up to the dot-com bubble at the start of this century. Over the past 10 years, the figure has averaged around 18x.
Another fear is the high concentration of value in the Magnificent Seven stocks. They account for around a third of the value of the S&P 500. This leads to worries that the market is too reliant on the success of these companies, which are banking so much on winning AI. I’ll highlight two stocks below that can help hedge against the potential market froth that some see.
