P/E Ratio for S&P7 vs S&P493

Apollo Chief Economist

The P/E ratio for the S&P493 has fluctuated around 19 in 2023.

And the P/E ratio for the S&P7 has increased from 29 to 45, see the first chart below.

The bottom line is that returns this year in the S&P500 have been driven entirely by returns in the seven biggest stocks, and these seven stocks have become more and more overvalued.

What is particularly remarkable is that the ongoing overvaluation of tech stocks has happened during a year when long-term interest rates have increased significantly. Remember, tech companies have cash flows far out in the future, which should be more negatively impacted by increases in the discount rate.

The conclusion is that tech valuations are very high and inconsistent with the significant rise in long-term interest rates, see the second chart.

In short, something has to give. Either stocks have to go down to be consistent with the current level of interest rates. Or long-term interest rates have to go down to be consistent with the current level of stock prices.

The P/E ratio for S&P7 has in 2023 gone from 29 to close to 45
Source: Bloomberg, Apollo Chief Economist. Note: 12-month trailing P/E ratio used.
The stock market is disconnected from 10-year rates
Source: Bloomberg, Apollo Chief Economist

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