Counting the cost

The capitalization-weighted S&P 500 Index trades at 21.7 times expected year-ahead earnings, about 15% above the 10-year norm of 18.9 and 31% higher than the 20-year norm of 16.1. Much of the premium reflects the 50 largest S&P 500 companies, which comprise about 60% of the index’s total value.

The average S&P 500 member trades at 21.5 times expected current-year earnings. But the largest 50 stocks trade at nearly 26 times expected current-year earnings.

Today’s top 50 are growing substantially faster than the top 50 of 10 or 20 years ago. The average top 50 company delivered nearly 13% year-to-year earnings growth in its most recent quarter, twice the average growth rate for all 500 companies. While the largest 50 stocks are expensive, these companies are delivering unusually rapid growth. If growth for the top 50 slows or earnings turn broadly lower, a bear market would not be surprising. But we do not expect stocks to collapse simply because valuations are too rich.