The most expensive in history! U.S. stock valuations have surpassed the dot-com bubble era

Behind the soaring U.S. stock market, which has reached historic highs, its valuation has reached unprecedented levels, even surpassing the peak during the internet bubble.

According to the latest data, the price-to-sales ratio of the S&P 500 index has reached 3.23 times, setting a new historical high.

Although some giant companies have substantial profit margins and the price-to-earnings ratio has not yet hit absolute records, it is still at historically extreme levels. Currently, the price-to-earnings ratio of the S&P 500 index based on expected earnings for the next 12 months is 22.5 times, significantly higher than the average level of 16.8 times since 2000.

Feast Driven by a Few Giants

The current phenomenon of high valuations in the U.S. stock market is largely the result of a few large technology companies dominating the market.

Many investors believe that the high valuations of these companies are justified, as firms like Nvidia and Microsoft continue to achieve remarkable sales and profit growth at an astonishing pace.

This dominance has reached a historically concentrated level. According to Morningstar data, as of the end of July, the largest 10 companies in the S&P 500 index accounted for 39.5% of the total market capitalization of the index, the highest level on record. Among them, nine companies have a market capitalization exceeding $1 trillion.

Steve Sosnick, Chief Strategist at Interactive Brokers, stated:

"In and of itself, I'm not that worried. The biggest question is what might happen if things change."

The market has already glimpsed the downside risks associated with this concentration. In a brief sell-off triggered by tariff policies in April, the "Mag 7" underperformed the overall S&P 500 index, while the S&P 500 index itself lagged behind the equal-weighted S&P 500 index.

This exposes the vulnerability of high valuations combined with crowded trades. Sosnick added:

"The combination of extremely high valuations and very crowded trades undoubtedly increases the likelihood of a prolonged market downturn. If everyone is actually long the same thing, then where do new buyers come from when they drop?"

"Valuation will matter sooner or later," but the market expectations it implies are equally important

Data shows that ordinary companies in the S&P 500 index are not at jaw-dropping price levels. If each company in the S&P 500 index is equally weighted rather than market-cap weighted, the price-to-sales ratio of that equal-weighted index would be 1.76 times, not far from its long-term average of 1.43 times.

Mark Giambrone, U.S. Equity Head at Barrow Hanley Global Investors, focused on value investing, stated that he is seeing a plethora of attractive opportunities for investors willing to look beyond large tech stocks.

“To some extent, some stocks are even valued below average,” Giambrone said. His firm tends to invest in companies that may benefit from productivity gains brought about by AI development but have not yet been labeled with "AI company valuations." Some market participants are skeptical about whether the largest companies can maintain their current valuations in the long term. They believe that over time, fundamentals and valuations will ultimately become the key factors determining stock prices.

Giambrone emphasized:

"Valuation will eventually matter, and the expectations behind these valuations are also crucial, and now these expectations are becoming so high that it will be difficult for companies to meet them."