The S&P 500 index has reached an historically high forward price-to-earnings (PE) ratio of 22.3, a level only seen twice since 1985 during the dot-com bubble and the Covid-19 pandemic. This valuation is considered a contrarian indicator signaling irrational optimism, and history suggests that the index may be due for a correction.
However, Goldman Sachs analysts note that while the top 10 stocks in the S&P 500 are overvalued, the remaining 490 stocks are priced more attractively, potentially offering more upside. According to the report, the primary culprits behind the high valuations are the top 10 companies, leaving the rest of the index with more room for growth.
The S&P 500 has a current forward PE ratio of 28.7 times earnings, significantly higher than its five-year and ten-year averages. This elevated valuation is concerning, as historical data suggests that the index never generated a positive 10-year return when the initial PE multiple exceeded 25.
Despite this, Goldman Sachs analysts predict an annual total return of 3% for the S&P 500 over the next decade, which is below its long-term average of 11%. However, they suggest that investors can accumulate extra cash in the current market environment, making it easier to capitalize on a potential correction or bear market.
Source: https://finance.yahoo.com/news/stock-market-doing-something-done-103500626.html