Barclays: U.S. stocks are not cheap, but tech stocks are not expensive

Despite the fact that U.S. stocks are not cheap, they do not seem to be overvalued, especially in the technology sector.

According to news from the Chase Wind Trading Desk, Barclays Bank pointed out in its latest research report that although the overall valuation of the S&P 500 has reached a price-to-earnings ratio of 22-22.5 times, it is not excessively inflated, especially as the valuation of technology stocks is relatively reasonable and still has room for growth.

Specifically, the performance of U.S. stocks during the second quarter earnings season was strong, with the S&P 500 index showing a 10.6% growth in earnings per share and a 6.1% increase in sales. However, this growth is still highly dependent on a few sectors, mainly from large technology stocks and the financial sector, while other sectors performed weakly. At the same time, Wall Street has raised its forecast for the full-year earnings per share of U.S. stocks in 2025 from $264 to $268, but expectations for the second half of the year have begun to factor in the negative impact of tariffs.

What is more noteworthy is that the valuation of technology stocks, which are the main growth engine of the market, is relatively reasonable. Large technology stocks are trading at about 29 times forward price-to-earnings ratio, still below the end-of-2024 level, and lower than their long-term average premium relative to the S&P 500.

For investors, this means that technology stocks still have room for growth, while the valuations of industrial stocks and other technology stocks appear to be overvalued.

Earnings season performance exceeds expectations, but growth is highly concentrated

Barclays stated that the second quarter earnings season of 2025 delivered impressive results. The S&P 500's earnings per share grew by 10.6% year-on-year, and sales increased by 6.1%, with the breadth and depth of earnings surprises exceeding long-term trends. The rate of exceeding expectations and the magnitude of surprises are both close to the highest levels in four years.

Despite the overall impressive performance, growth remains highly concentrated in a few sectors. Large technology stocks saw earnings per share growth of 27.6% this quarter, while other stocks in the technology sector grew by 19.7%, far exceeding their long-term historical average of 8.7%. The communication services sector performed the best, with a growth of 24.8%.

This strong performance is mainly driven by a few sectors. TMT (Technology, Media, Telecommunications), especially large technology stocks, as well as the financial sector, remain the main sources of earnings growth, margin expansion, and operating leverage for the S&P 500. In contrast, consumer stocks (excluding Amazon), materials, and utilities performed weakly, with earnings per share growth lagging significantly behind their long-term growth pace.

In terms of profitability, the communication services and financial sectors showed the most significant improvement in margins, being the only two sectors to achieve positive operating leverage. The energy, utilities, and materials sectors experienced margin declines and negative operating leverage.

Valuation divergence: Technology stocks are reasonable, industrial stocks are overheated

Currently, the price-to-earnings ratio of the S&P 500 is fluctuating in the range of 22-22.5 times, a level that Barclays previously considered not necessarily a performance obstacle.

The key point is that large technology stocks, which are the main engines of earnings growth for the S&P 500, are currently trading at about 29 times forward price-to-earnings ratio, still below the end-of-2024 level, and lower than their long-term average premium relative to the S&P 500.In contrast, the valuations of industrial stocks and other technology stocks appear to be overvalued. Industrial stocks are currently trading at a price-to-earnings ratio of 25, which is relatively high compared to the long-term history of the S&P 500, primarily driven by aerospace and defense and electrical equipment, reflecting two major market themes: fiscal spending and data center/AI investment.

The valuations of S&P 500 constituents outside of technology stocks remain stable at nearly 20 times, roughly unchanged since the beginning of the year. In an overall market risk appetite, defensive sectors show a lower-than-average premium or a higher-than-average discount relative to the S&P 500.

Additionally, Wall Street has significantly raised its forecast for the S&P 500 index's earnings per share for the full year 2025 from $264 to $268, mainly driven by large technology stocks, industrials, and financial sectors. In contrast, the consumer discretionary (excluding Amazon), consumer staples, healthcare, and utilities sectors have dragged down the overall expectations.

Tariff concerns ease but remain, corporate pricing strategies become cautious, AI discussions continue to expand

Barclays found through AI analysis of earnings call reports that while tariff and pricing concerns remain high, they have eased compared to the previous quarter. The proportion of executives discussing tariffs or trade dropped from 90% in the first quarter to 76%, and the average number of discussions nearly halved.

Discussions about the impact of tariffs "next year" have increased, but from a low base, accounting for only 1-3% of earnings calls. Executives have a more positive view on inventory levels, with mentions of "high inventory" decreasing and mentions of "competitive inventory" increasing, indicating that inventory levels are closer to a comfortable range.

The proportion of executives discussing "pricing" or "price increases" has fallen to 75%, suggesting that companies are not broadly planning price hikes. This supports the judgment that the peak of tariff uncertainty has passed and that mitigation measures have taken effect, but trade and macro uncertainties remain a focus for management.

Furthermore, about 55% of executives discussed general AI topics such as artificial intelligence, big data, and large language models in earnings calls, continuing a steady upward trend. In contrast, only about 2% of executives mentioned specific AI technology developments like deep learning and prompt engineering.

AI discussions are increasingly focused on efficiency improvements, with over 3% of earnings calls linking general AI topics to "efficiency." This quarter saw an increase in discussions linking AI to "impact" and "improvement," while discussions related to "cost" decreased