The S&P 500 (^GSPC) just hit its first record close since early February, which means a familiar talking point is also back in the market discussion.
The S&P 500’s valuation is back above both the five- and 10-year averages. This is often used as a way to describe stocks as “expensive.” But as we’ve pointed out in the past, just because valuations are high doesn’t mean they can’t stay high for an extended period of time.
It also doesn’t mean they can’t keep moving higher. The chart below from Exhibit A co-founder Matt Cerminaro shows that when splitting the S&P 500 into deciles organized by least and most expensive, the current market is far less expensive than the peak of the 2021 stock boom.
For instance, the average stock in the most expensive bucket is trading at a 63 times forward 12-month price-to-earnings ratio, well below the 104 times forward earnings seen back in 2021.
“Price earnings multiples are a function of investor confidence, which is a constantly moving target and has very little in the way of natural limits on either the upside or downside,” DataTrek co-founder Nicholas Colas wrote in a note to clients on Wednesday.
The S&P 500’s most recent record close comes as the market has rallied more than 23% from its April 8 bottom. Now, strategists believe the market’s largest tariff fears are behind investors. Economic forecasts have once again begun reverting higher, along with projections for corporate earnings this year. And Wall Street strategists are becoming incrementally bullish on the outlook from here.
No fewer than 11 Wall Street firms lowered their S&P 500 targets amid the market sell-off in April. At least eight of those have since raised their bets on where the index will end 2025. The latest was BMO Capital Markets chief investment strategist Brian Belski, who raised his year-end target to 6,700 from 6,100 on Tuesday.
“The signposts we called out in April are largely in place – markets are transitioning TO ‘show me’ FROM ‘scare me,”‘ Belski wrote. “We believe performance is broadening, reactions from daily rhetoric are calming, and actual corporate guidance will increase coming out of the 2Q earnings reporting period.”
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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