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Valuation premium:
The S&P 500 is currently trading at record levels.
Despite multiple crises, the US index has gained 20 percent within a year
Photo: Angela Weiss / AFP
Investors like
Warren Buffett
primarily look at one key figure when evaluating stocks: the price-earnings ratio.
And that is currently reaching new highs for US securities.
The S&P 500, which represents the 500 largest companies in the USA, is currently trading at a record level of around 4,850 points and has a price-earnings ratio of 26.
The market therefore assumes that corporate profits will increase significantly in the future.
With the exception of the Corona boom in 2021, when the value temporarily rose to 34, the P/E ratio has averaged around 20 in recent years. For comparison: the DAX has had an average value of 14 in recent years.
The S&P 500 has once again built up a visible valuation premium compared to its long-term average.
According to a rule of thumb on the stock market, values above 20 are considered excessive.
So have US stocks already become too expensive?
No, says
Sven Streibel
, chief equity strategist at DZ Bank.
“US stocks at all-time highs are cheaper than expected,” says the expert.
Streibel sees “the price increase as justified.”
Success of the "Magnificent Seven" takes the index to new heights
“From a historical perspective, we are currently in a new bull market for the S&P 500 after the price losses from 2022,” says
Andreas Hackethal
, professor of finance at Goethe University in Frankfurt am Main. There is talk of a bull market when the losses of the were fully recovered from the last bear market in 2022.
The recent price rally and recovery of the S&P 500 in 2023 is primarily thanks to the large US tech companies, the so-called “Magnificient Seven”.
While Microsoft shares were still around 210 euros at the beginning of 2023, they are currently trading at 364 euros.
Driven by the AI boom, the shares of chip manufacturer Nvidia have tripled since the beginning of 2023.
Apple, Alphabet, Meta, Amazon, and Tesla also gave numerous investors dream returns.
However, the hype surrounding the "magnificent seven" distorts the overall picture, because due to their high index weight of more than 28 percent, they dragged the entire S&P 500 up with them.
So far everything is good for tech, but what about the stocks of other US companies?
In an analysis, DZ analyst Streibel therefore separates tech stocks from non-tech stocks.
“With the boom in artificial intelligence, the US technology sector experienced a comeback and boosted the entire US stock market due to its high weighting,” says Streibel.
This increase is justified because the booming topic of AI promises many companies increasing profits in the future.
Finally, demand for AI applications is increasing worldwide, including in Germany: According to Bitkom, spending on AI software, services and hardware in the Federal Republic will have increased by a third to 6.3 billion euros in 2023.
The industry association expects further growth of 30 percent in 2024.
The market research institute Markets and Markets predicts that the AI market could reach a volume of 407 billion US dollars by 2027 - this would mean that sales would more than triple within four years.
Non-tech stocks with recovery opportunities – if the Fed delivers
How strongly the AI boom has influenced the entire index can be seen when looking at the non-tech stocks in the S&P 500. Their overall valuation even fell slightly in the 2023 stock market year.
“The old economy is currently suffering from economic uncertainty, similar to Europe,” said Streibel.
The fear of a deep recession has recently subsided: In the USA, the majority of observers now assume that the US Federal Reserve will start cutting interest rates in good time this year before the US economy slips into a deep recession.
While the major US bank Goldman Sachs recently stated that the probability of a recession in the US in 2024 has decreased, Bank of America is also talking about a likely “soft landing”.
Analyst Streibel therefore sees opportunities outside of tech.
“Non-tech stocks are currently not really more expensive than they were before the corona pandemic,” he says.
There is potential to catch up, especially for economically sensitive stocks, should the economy recover slightly this year after the moderate economic weakness in 2023.
The US interest rate policy will also ensure a recovery, said Streibel.
The majority of market participants are currently expecting three interest rate cuts from the US Federal Reserve, one in June and two more in the second half of 2024. The interest rate cuts are likely to stimulate the economy and thus also support cyclical industrial stocks outside the tech sector, according to the argument.
Expectations of falling interest rates are keeping international fund managers “bullish” on U.S. stocks for 2024, Bank of America (BofA)’s monthly survey shows.
They are relying more heavily on US securities than they have in two years.
15 percent have a clear overweight of US stocks in their portfolio.
71 percent expect the hoped-for “soft landing” to be successful – i.e. falling inflation rates with at best a mild recession.
However, after the Fed's eleven interest rate increases within a short period of time, a "soft landing" of the economy is not a given, but would rather be seen as a feat.
Presidential election as a market factor
There are also presidential elections in the USA in November 2024.
“Historically, a US election year is one of the better years for stocks,” says analyst Streibel.
He expects positive impulses for the stock market.
The incumbent US President
Joe Biden
has already tried to stimulate the US economy with the Inflation Reduction Act (IRA).
If the new president is
Donald Trump
, this will likely cause concern among European partners.
But the US economy could also benefit under Trump.
“A strong US economy should not only support the domestic stock market, but also that of our trading partners,” says Streibel.
After all, around 30 percent of company sales in the DAX are generated in the USA.
The upcoming US election and the associated fluctuations have already been priced into the S&P 500, adds Hackethal, who also heads the Pension Finance Lab at the Leibniz Institute SAFE.
Other factors, such as the AI boom and the companies' growth potential, are also taken into account in the current valuation of the S&P 500.
But these are just a few factors among many when considering US stocks, warns the expert.
He advises that current analyzes and forecasts for the S&P 500 be viewed with caution.
“From a scientific point of view, it is not permissible to read possible overvaluations purely based on a price-earnings ratio,” says the expert.
It is also dangerous to derive possible developments for the future from the patterns of the past.
If you look at the past 60 years, phases of rising prices on the stock market (bull markets) were usually significantly longer than phases of falling prices (bear markets).
These bear markets lasted on average around ten months each, while bull markets lasted on average over 50 months.
Based on this narrative, the signs point to further rising prices.
But this is also just reading coffee grounds.
“The next bear market is sure to come, but no one knows when it will happen,” says Hackethal.
Strategies for a robust portfolio
“There are important strategies for investors that they can use to build a more resilient portfolio,” says Hackethal, who currently heads the Pension Finance Lab at the Leibniz Institute SAFE. One approach is cross-sector diversification, i.e. the broad distribution of investments across different sectors Sectors and industries. When the market is in an upswing phase, sectors such as technology usually benefit particularly strongly. However, when the market takes a turn, defensive sectors such as pharmaceuticals or consumer staples usually perform better. The mix of different sectors ensures a overall more stable performance.
Another option for investors is to diversify by asset class.
Anyone who includes bonds in their portfolio in addition to stocks generally reduces the risk in times of weak stock markets.
Anyone who does not focus exclusively on the US economic area, but rather on the entire global economy with a global stock index, is also more broadly positioned.
New risks on the horizon
But it's not just the economy, inflation and interest rate developments that influence share prices.
According to a recent survey of 1,490 managers by the World Economic Forum, extreme weather situations, AI-generated fake news and social and political polarization are currently the most dangerous sources of fire for companies.
Cyber attacks could also have a greater impact on the market than before, according to a survey result.
Only 33 percent of the top managers surveyed see a possible recession or economic downturn as a problem.
“There are still a lot of risks that will affect the US market this year,” says Hackethal.