Polytech: Tech "Big Seven" Boosts US Stock Valuations, But Valuations Remain Reasonable

Zhitong App learned that Tim Murray, the capital market strategist at Plaisir's diversified asset division, shared his views on the valuation of US stocks and the "Big Seven" US technology stocks. Although the rise in interest rates has had an impact on the US economy since 2023, data shows that the US economy is still robust and supports the continued improvement of the earnings prospects of US stocks. However, investors are still concerned that the valuation of US stocks (based on forward P/E ratio) is too expensive. In-depth research has found that the valuation of US stocks is becoming increasingly expensive, mainly due to a few high-weighted stocks in the S&P 500 index, namely the "Big Seven" technology stocks: Alphabet-C (GOOG.US), Amazon (AMZN.US), Apple (AAPL.US), Meta (META.US), Microsoft (MSFT.US), NVIDIA (NVDA.US), and Tesla (TSLA.US). As of October 23 this year, the weight of these stocks in the S&P 500 index exceeded 28%.

Tim Murray pointed out that the P/E ratio of the "Big Seven" technology stocks is much higher than that of other stocks in the S&P 500 index. Based on market capitalization weighting, as of October 23, the forward P/E ratio of these stocks was 27.4 times. If these stocks are excluded, the P/E ratio of the S&P 500 index is 15.4 times. This reflects that, overall, US stocks are not expensive, but the valuation of the "Big Seven" is higher.

However, comparing the P/E ratio of the index with the return on equity (ROE) of the "Big Seven" can be found that although these companies are expensive, their ROE is also higher. As of October 23 this year, the market capitalization-weighted ROE of the "Big Seven" technology stocks was 32.6%, while the ROE of the S&P 500 index, excluding these stocks, was 17.2%. Therefore, the overall valuation of the "Big Seven" technology stocks and the valuation of US stocks are still reasonable. Investors should pay more attention to whether these seven companies can maintain their profitability and efficiency levels.