Analysis: The Shift in Stock Valuations – A Historical Perspective Shift in Stock Valuations: A Historical Lens

Written By Michael Gary Scott

Comparing Modern Giants to Past Titans

Present-day top stocks exhibit significantly lower valuations when juxtaposed with the towering giants of the Nifty Fifty era and the infamous Tech bubble. Goldman Sachs analysts underscore that these contemporary stocks boast superior profit margins and return on equity compared to their historical counterparts.

The New Guard vs. the Old Guard

In their U.S. Equity Views report, analysts draw parallels between today’s dominant stocks and those that reigned supreme in the late 1990s and early 1970s.

The current decadal behemoths—MSFT, AAPL, NVDA, AMZN, GOOG, META, BRK-B, LLY, AVGO, V—command a staggering 33% share of the S&P 500 market cap and contribute 25% to its earnings. In stark comparison, the top 10 stocks during the tech bubble accounted for 27% of the market and an equal share of earnings, featuring heavyweights like MSFT, CSCO, GE, INTC, XOM, WMT, ORCL, IBM, C, LU-OLD.

Valuation Realities

These titans of today carry a collective forward P/E multiple of 25x, markedly lower than the lofty valuations witnessed during the peaks of the 2000 tech bubble, the 2020 market surge, or even the mid-2023 period, as asserted by GS analysts.

Despite the S&P 500’s 30% surge over the last year, the median index saw a modest 11% rise, igniting investor apprehensions regarding market concentration vis-à-vis recent historical trends. However, today’s market, although concentrated, touts notably lower multiples. The P/E ratio of the current largest stocks stands at 31x for the trailing 12 months, contrasting sharply with figures of 53x in 2000 and 35x in 1973.

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Lessons from the Past

Examining periods of heightened concentration reveals notable historical insights. Previous instances of market concentration surges occurred in 1932, 1939, 1964, 2009, 2020, besides the famous peaks of 1973 and 2000. In the aftermath of these episodes, the S&P 500 generally experienced more rallies than downturns, albeit marked by significant momentum swings.

Analysts caution against fears of an impending market plunge triggered by a stumble in the largest stocks, highlighting that instances of ‘catch up’ are more prevalent than ‘catch down’ events. Noteworthy are the 26 momentum reversals since 1930, characterized by a decline of 20 percentage points or more in the long/short momentum factor, where ultimately, the underperformers rebounded.

The data points to a recurring trend where post-market sell-offs, investors seek refuge in perceived safe havens, flocking to the market’s most crowded stocks.