The S&P 500 has recently scaled new historic heights, a significant milestone that resonates across the U.S. stock market, mirrored by the Nasdaq 100 and the Dow Jones Industrial Average.
The achievements made by these indices raise a pivotal question: Are we witnessing an overvaluation in the U.S. stock market, or do these levels still present a fair, investable landscape?
Latest data from FactSet offers a comprehensive answer to this question.
US Stock Market: Present Valuations
The forward 12-month price-to-earnings (P/E) ratio for the S&P 500 stands at 19.5. This figure surpasses the five-year average of 18.9 and the 10-year average of 17.6, suggesting slightly higher market valuations for the cap-weighted index comprising the largest 500 U.S. stocks.
A similar pattern is evident in the Dow Jones and Nasdaq 100 indices.
The Dow, as tracked by the SPDR Dow Jones Industrial Average ETF (NYSE:DIA), is trading at 18.4 times its forecasted year-ahead earnings, a value that aligns with its 5-year average but is slightly higher than its 10-year benchmark of 17.1x.
Meanwhile, the Nasdaq 100’s valuations, as observed through the Invesco QQQ Trust (NASDAQ:QQQ), are at a P/E ratio of 25.9x. This level is consistent with the five-year average of 25.6x but exceeds the 10-year average of 22.9x.
Despite the slightly elevated figures above the average, the present valuations of the U.S. stock market do not significantly indicate an overvaluation concern.
The peak forward P/E ratios for the S&P 500 ETF Trust (NYSE:SPY) and the SPDR Dow Jones Industrial Average ETF over the past decade were reached in June 2020, with the S&P 500 hitting 25x and the Dow Jones touching 24x. In contrast, the Nasdaq 100’s valuations soared even higher, reaching 33.8 times anticipated earnings in September 2020.
| Metrics | S&P 500 (SPY) | Dow Jones (DIA) | Nasdaq 100 (QQQ) |
|---|---|---|---|
| Current P/E Ratio | 19.5 | 18.4 | 25.9 |
| 5-Year Average P/E Ratio | 18.9 | 18.4 | 25.6 |
| 10-Year Average P/E Ratio | 17.6 | 17.1 | 22.9 |
| Peak P/E Ratio (Last Decade) | 25.0 | 24.0 | 33.8 |
| Peak P/E Ratio Date | June 2020 | June 2020 | September 2020 |
A sector-specific focus shows significant variation in forward P/E ratios within the S&P 500. The Information Technology and Consumer Discretionary sectors exhibit the highest forward 12-month P/E ratios, at 27.1 and 24.6, respectively. On the…
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