The S&P 500 (VOO) Is Misleading Investors, but There Is Still Value If You Look for It

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24/7 Wall St. Key Points:

• Many stocks in the S&P 500 are flat or down for the year, raising questions about the range of the market.
• The recent surge of the “Magnificent Seven” (mega-cap tech stocks) is highly concentrated and has skewed results
• Valuations are still stretched; the S&P 500 trades at a high PE ratio (28–32), and some mega-cap firms like Nvidia Corp. (NASDAQ: NVDA) reach PEs of 120, therefore posing dangers of a significant downturn should more general market mood become sour.
• While the S&P is on shaky footing, many investors are looking at incredible 4% (or better) yields in savings accounts. See our top pick for the best high-yield savings account today. (Sponsor)

Watch the Video

Transcript:

[00:00:00] Douglas McIntyre: S& P 500. Fascinating story in the wall street journal. So the S& P 500, everybody says, well, if the S& P 500 is going up, all 500 stocks must be going up. And guess what? Guess what?

[00:00:16] Lee Jackson: No.

[00:00:17] Douglas McIntyre: Many, many, as many as half of the in the S&P 500 do not have do not have stocks that are going up. So if you’ve got, let’s call it half, half of those stocks, either sideways or down, what does it tell you about the breadth of the market advance?

[00:00:37] Lee Jackson: It’s horrific. At one point, I think the Magnificent Seven was accounting for 90 percent of the move, the major indices. 90 percent with seven companies. So yeah, if everybody is trading sideways, then what’s the true value of the S& P 500?

[00:00:58] Douglas McIntyre: Well, also, and you’ve pointed this out to me many times on a, on a PE basis, the S&P 500 is expensive right now.

[00:01:06] Lee Jackson: Incredibly expensive.

[00:01:08] Douglas McIntyre: If you look at the Magnificent 7, the PEs on those stocks in many cases are well above that,

[00:01:14] Douglas McIntyre: you

[00:01:15] Lee Jackson: Oh, quite a bit. Yeah.

[00:01:16] Douglas McIntyre: Depending on how you measure it, the PE on the S& P 500 is like 28 and 32, depending on who you ask.

[00:01:24] Lee Jackson: Yeah.

[00:01:24] Douglas McIntyre: the PEs for some of these mega cap companies are much higher than, I don’t even know what it is on NVIDIA. It must be some like incredible.

[00:01:34] Lee Jackson: 120 or 140 or something like that. Probably. Yeah.

[00:01:37] Douglas McIntyre: But that tells me that the PEs of a lot of these companies that are like, you know, not in the top 20 are probably quite low.

[00:01:47] Lee Jackson: Yeah. And, and there’s probably a good argument. And I think our pal, Barry Bannister at Stiefel, who we wrote a piece on because, you know, he’s, he’s been right on and spot on for years. We’ve covered him here at 24 seven for years. And he basically thinks like, Hey, but This rally has a little more legs into next year than he thinks.

[00:02:07] Lee Jackson: There’s a 10 to 15 percent hard sell off just so we can get back to some normalized levels. And that only would take the S&P down to 5, 300, something like that. And when, when he made the big call in the, in the early 2020, it was like 670. So there’s value and value may very well be the trade for 2025.

[00:02:30] Lee Jackson: And maybe beyond there is the value. Of the S&P X, the magnificent seven,

[00:02:37] Douglas McIntyre: Well, I’ll say this. I am worried about the stock market after I’m told by the wall street journal you’ve got so many of the stocks. In there that either sideways or down.

[00:02:54] Lee Jackson: right?

[00:02:55] Douglas McIntyre: I mean, I like, I look for breadth when you talk about just the general market to you, do you like, do you want to buy an S&P 500 index mutual fund or ETF that makes me nervous.

[00:03:08] Douglas McIntyre: I’m now nervous about the valuation, not the PE as much as the fact that there isn’t as much breadth as I thought.

[00:03:14] Lee Jackson: Yeah. And which means plain and simple that when the selling does come to the bigger names that have driven all these upside gains, you know, remember when, when people start selling their, their spiders or their, you know, whatever they’re using S&P managers have to sell everything. They don’t just go in and sell the, know, the Magnificent Seven, they’ll have to sell everything.

[00:03:43] Lee Jackson: So that means that stocks that are, that are flat or just up two or three or five percent, they’ll get nailed again too.

[00:03:50] Douglas McIntyre: There’ll be, there’ll be back down. .

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