The S&P 500, the main yardstick for U.S. stocks, has once again reached record highs. A mild inflation report gave markets a boost, reversing a brief dip caused by a downward revision to earlier job numbers. Bonds have also climbed in value as investors grow more confident that the Federal Reserve may cut interest rates once or twice before the end of the year.
Ask Cale
Q: Is the Stock Market Expensive Right Now?
A: Maybe… it depends on how you measure it. If we look at the S&P 500 as a whole, stocks are definitely priced higher than average. One common measure is the price-to-earnings ratio, or P/E. This tells you how much investors are paying for each dollar of company profits.
Right now, the S&P 500’s P/E ratio is about 22.4, compared to its 30-year average of around 17. That means investors are paying more for earnings than they usually do.
But here’s the key: a higher P/E ratio doesn’t necessarily mean the market is “too expensive.” If company profits are expected to grow strongly in the future, paying a bit more today can still make sense.
That’s exactly what we’ve been seeing in some of the market’s biggest companies… the so-called “Magnificent Seven” (think Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta, and sometimes Tesla or Broadcom). These giants have been delivering blockbuster earnings growth, far outpacing most other companies in the index.
In the first quarter of this year, the Magnificent Seven grew profits by roughly 32% compared to last year. The other 493 companies in the S&P 500 grew earnings by about 8%. That’s still healthy, but it shows how much a few companies are driving the overall numbers.
The market’s strength right now is undeniable, but it’s not guaranteed to last. If earnings from these top companies slow sharply—or worse, fall—the market could just as easily give back gains as it did climb to new highs.
