Stock valuations are getting frothy again, but this time, it’s not all Big Tech’s fault.
Yes, valuations of the Magnificent Seven stocks — Apple, Amazon, Microsoft, Meta, Alphabet, Nvidia, and Tesla — are back up after since bottoming in April. Yet, the group’s 12-month forward price-to-earnings ratio is still down from mid-2024, mid-2023, and 2020 levels.
Meanwhile, forward PE ratios on the next 20 stocks in the S&P 500 continue to surge, topping levels seen earlier this year. Their valuations are also higher than at any point over the last decade.
Arun Sai, a senior multi-asset strategist at Pictet Asset Management, calls the group the “Terrific 20.”
Pictet Asset Management
Some may see the rising forward expectations for a widening number of stocks as a sign of health, as the rally extends beyond just the most popular stocks.
But when stocks rise because of multiple expansion instead of earnings growth, it may be a sign that investor sentiment is becoming overheated.
“These companies span a broad set of sectors more closely tied to the real economy, including financials, energy, industrials, consumer, and legacy tech,” Sai wrote on Tuesday. “Names like Broadcom, Walmart, JPMorgan, Berkshire Hathaway, Visa, and GE Aerospace now account for ~17% of the MSCI US index, compared to 33% for the Mag 7.”
“Broader participation is a positive — when it’s driven by earnings,” he continued. “But when more of the market gets expensive, the narrative that ‘US equities aren’t overpriced, just a few exceptional companies are’ becomes harder to justify.”
Sai compared the current environment to the so-called “Nifty Fifty” bubble in the 1960s.
Richard Bernstein, the founder of Richard Bernstein Advisors and former chief investment strategist at Merrill Lynch, said in June that there are parallels to another famous episode of euphoria—the dot-com bubble of 2000—as the market seems solely focused on an emerging technology.
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On Wednesday, Bernstein reiterated his skepticism of the rally, noting that the market is still relatively concentrated even if valuations are surging among more than just the top seven stocks.
Trading of leveraged ETFs, zero-day options, and low dollar-value stocks is also picking back up, signs of excess optimism, he said.
“If you’re a trader, I think you should take a deep breath and kind of look at what’s going on and realize that everybody’s in this huge speculative fervor,” Bernstein told Business Insider. “But if you’re an investor and you want to be a little patient, I don’t think it gets much better than this.”
“The reckless abandon is going to leave you with so many opportunities,” he continued. “It’s going to be like post-2000.”
Most Wall Street strategists don’t see a dramatic pullback ahead, and few have made direct comparisons to prior bubble episodes. In recent days, however, some have extended quiet warnings to investors about the market’s near-term direction.
Ulrike Hoffmann-Burchardi, CIO Americas and global head of equities at UBS Global Wealth Management, said in a note on Tuesday that “investors should be mindful of potential market swings in the coming weeks,” and that “capital preservation or phasing-in strategies can be effective in navigating near-term volatility.”
While valuations are no doubt extended, there’s no guarantee a major market top is near, and the AI trade may have room to run as the technology evolves.
Meta and Microsoft, for example, reported strong earnings beats this week and gave positive forward guidance, causing shares to soar.