The S&P 500 is overvalued according to traditional valuations, at least that is how it appears.
1. historical overvaluation and current key figures
Overvaluation based on historical data:
- 19 out of 20 valuation metrics indicate that the S&P 500 is more expensive than the long-term average.
Current valuation figures:
- The P/E ratio is currently around 30.5.
- The price-to-sales ratio is currently around 3.2.
These values show that the index is considered "expensive" by traditional standards.
2 Why is the S&P 500 so highly valued?
Dominance of mega-cap stocks
The S&P 500 is currently undergoing a transformation that is characterized by the increasing dominance of the Magnificent 7 ($GOOGL (-2,28%) | $AMZN (-2,39%) | $AAPL (+0,26%) | $META (-1,11%) | $MSFT (-1,57%) | $NVDA (-3,63%) | $TSLA (-4,32%) ). Companies such as Apple, Microsoft and Nvidia play a disproportionately large role in the index due to their market capitalization-based weighting. Although their strong growth, stable profits and their positions in key sectors such as AI, cloud computing and chip tech justify higher valuations, their share of the total market value of the index has increased significantly in recent years:
While they accounted for less than 10% of the index some time ago, their aggregated share is now around 30%. As a result, the expensive valuations of these mega caps distort the overall assessment of the S&P 500. The more moderate or even favorable valuations of smaller companies in the index are often masked as a result, which entails the risk that the apparent "inflation" of the overall market reflects Mag 7 rather than the broad market reality.
More robust company fundamentals
Many companies today are targeting recurring revenue streams such as software-as-a-service or subscription models, which allow for greater predictability of cash flows. This strategy not only reduces cyclical risks, such as less dependence on one-off sales or cyclical markets, but also creates a more reliable foundation for long-term growth. At the same time, companies have optimized their balance sheet structures through lower debt, high cash reserves and more efficient capital allocation, for example through targeted share buybacks or investments in profitable growth. These factors support higher valuations as investors are willing to pay a premium for stable earnings and lower default risks. Taken together, these developments mean that the seemingly high valuations of the S&P 500 may be justified not only by speculation but also by fundamental improvements in business models and financial discipline
Strategic change in companies
A key trend in corporate strategy today is the prioritization of efficiency & profitability over aggressive expansion. More and more companies are focusing on operational perfection and rather low-capital business models, comparable to cloud services or software. This focus not only reduces dependence on expensive infrastructure projects or physical assets, but also increases margins and resilience in volatile markets.
At the same time, there has been a profound structural change in the S&P 500, as the proportion of traditional industrial companies has fallen from 70% to around 50% since 1980. This development reflects the rise of digital, tech sectors, which are characterized by their scalability, global reach and often higher profit margins. Sectors such as software, cloud computing and AI are increasingly dominating the index, while capital-intensive industries are losing weight.
3 Risks and counterarguments
The risks and counterarguments to the current situation of the S&P 500 can be summarized in three main points. Firstly, there is a concentration risk as the index is heavily dependent on a small number of tech companies. If these companies are affected by regulatory measures or unexpected slumps in growth, this could weigh on the market as a whole. Secondly, the index is sensitive to interest rates. Rising interest rates could put pressure on high valuations even for companies with solid fundamentals, as higher interest rates reduce the attractiveness of growth stocks. Thirdly, the current valuation premium is based on the assumption that companies will achieve their optimistic earnings forecasts. If these expectations not If these expectations are not met, there could be a correction, as valuations could then be seen as excessive.
From my perspective, comparing today's S&P 500 to historical valuations is difficult as both the composition of the index and the business models have changed significantly. The dominance of tech and the shift towards more efficient, scalable business models make the index different today than in the past. I also see that the current high valuations of the S&P 500 are not necessarily excessive, but could be partly justified by structural changes. Market conditions have adjusted and higher multiples may reflect a "new normal" due to changing guidance on corporate earnings and market stability. Nevertheless, it remains important to keep an eye on the risks, as valuations are heavily dependent on the fulfillment of these optimistic expectations.
