As the S&P 500 continues to hit fresh milestones with a first-ever break above the 5,000 level, its valuation is reaching new heights as well.
The S&P 500’s (.SPX), opens new tab forward price-to-earnings ratio — a commonly used metric to value stocks — this week rose to 20.4 times, a level last reached in February 2022, according to LSEG Datastream. That puts it far above the index’s historic average of 15.7.
It isn’t unusual for valuations to climb along with stock prices, and equities can stay expensive for a long time before returning to more moderate levels. Still, some investors believe the index’s growing multiple has made buying into the broad market a less enticing proposition. The S&P 500 has surged 21% since late October, making new record highs along the way.
It briefly crossed the 5,000 level at the end of Thursday’s session, before closing just below the mark.
“There is nothing screaming from the rooftops that at 20 times you have to sell,” said Mark Hackett, chief of investment research at Nationwide. “It’s just you’d obviously rather buy at 15 times.”
Stock valuations have risen even as Treasury yields have rebounded this year, following a rethink of how soon the U.S. Federal Reserve will begin cutting interest rates
Higher yields tend to pressure equity valuations as it means bonds are offering more investment competition to stocks and that future company cash flows are valued less highly. That means stock valuations could rise further if the Fed delivers its widely expected cuts and yields fall. The 10-year Treasury yield was last around 4.16%.