The biggest stocks in the US have never been bigger, but they have never looked much cheaper relative to the rest of the market.
For years, commentators worried that investors were piling into a handful of mega-cap tech stocks at lofty valuations, leaving markets exposed if those valuations were to contract. Thus, it became commonplace to talk not about the S&P 500, but about the Magnificent Seven and the S&P 493, and the vast valuation gulf between the two.
Well, no longer. The gulf has all but disappeared, notes JPMorgan, with the 10 biggest companies in the S&P 500 now trading on 19.8 times estimated earnings – almost the same as the other 490 (19.3).
It can seem counterintuitive, because we are used to reading headlines about tech stocks hitting new highs, not becoming cheaper. However, the explanation is straightforward.
RM Block
Nine of the 10 biggest companies are technology stocks, and big tech’s earnings have been growing faster than their share prices. The net result, Schroders noted recently, is that “valuations for many of the big tech companies” are at or near “their cheapest levels for a decade”.
And while the mega-cap tech companies have been growing into their valuations, the other 490 stocks have been getting pricier, with current valuations above historical norms.
Big tech still dominates the index, but increasingly, it does not dominate its valuation.
