Getting nervous about the S&P 500's nearly 9% jump this year? You should be, says a top money manager.
The S&P 500 is now 20% overvalued based on calculations comparing the stock market with the bond market, says Jack Ablin, chief investment officer at Cresset Capital Management. That's a scary pronouncement as it means a 20% crash is needed just to make the S&P 500 fairly priced.
"The S&P, on a capitalization-weighted perspective, is expensive," Ablin said.
Why The S&P 500 Is Expensive
Ablin uses a clever set of calculations to gauge the S&P 500's valuation. And the results all point to investors paying up way too much for the S&P 500.
Specifically, he compares the yield on BBB-rated corporate bonds against the S&P 500's forward earnings yield. The result is concerning.
The earnings yield on the S&P 500 is currently 4.8% based on expected 2024 profit. That's considerably less lucrative than the 5.9% yield on 10-year BBB corporate bonds. For the S&P 500's earnings yield to be equally compelling compared with BBB corporate bonds, the S&P 500 would need to tumble 20%, Ablin says.
Ouch.
What's The Bright Side?
Luckily, though, Ablin isn't telling investors to dump all their S&P 500 stocks. Much of the overvaluation is due to wild premiums paid on a "handful of high-quality megacap technology companies," Ablin said, alluding to Nvidia, Microsoft, Apple, Amazon.com and Meta Platforms.
He says most other S&P 500 stocks have risen in line with their earnings and dividends since 2010. Their valuations are still reasonable.
Additionally, valuation alone is rarely a reason to sell the S&P 500. Expensive stocks can get yet more expensive. "Valuation is not a timing tool," Ablin said. "Valuation is only one metric in a mosaic that we continuously track to gauge the market, which also includes the economic backdrop, liquidity, psychology and momentum."
Priciest S&P 500 Stocks
Those with the highest forward P-E ratios
| Company | Ticker | Forward P-E | Sector |
|---|---|---|---|
| Digital Realty Trust | 116.6 | Real Estate | |
| CoStar Group | 116.5 | Real Estate | |
| Boeing | 99.1 | Industrials | |
| UDR | 96.6 | Real Estate | |
| Illumina | 88.2 | Health Care | |
| Axon Enterprise | 71.1 | Industrials | |
| Welltower | 70.7 | Real Estate | |
| Dexcom | 67.5 | Health Care | |
| Camden Property | 64.7 | Real Estate | |
| Tesla | 62.9 | Consumer Discretionary |
