Controversy Over S&P 500 on Wall Street Amid Nvidia Adjustment: "Peak" vs "Will Rise Further"

So far this year, the US S&P 500 index has broken its all-time high roughly once every three trading days, reflecting a steep upward trend, which has led to a resurgence of peak concerns on Wall Street. On the other hand, despite the significant rise in stock prices, there is considerable counterargument that corporate valuations are not overvalued like during the 2000 dot-com bubble or the 2020 COVID-19 bubble, as profitability has also greatly increased, centered around the "Magnificent 7 (Nasdaq's 7 major tech stocks, M7)."

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The S&P 500 index has set a new all-time high a total of 16 times this year. Amid this, as the recent trading days saw the market leader NVIDIA taking a breather, claims of a peak and concerns about a market bubble have also surfaced.

NVIDIA's stock price fell 6% in the previous trading day and dropped another 2% on the 11th (local time). Bloomberg reported that given Apple's weak iPhone sales in China and lukewarm market reactions to initial public offerings (IPOs), bubble fears regarding the S&P 500 index are growing on Wall Street.

However, Bloomberg also analyzed that although the S&P 500 index's stock prices have risen significantly, the valuation remains similar to before due to the solid earnings of the M7. According to Bloomberg's own compiled data, the current price-to-earnings ratio (PER) of the M7 is about 33 times, trading near the average PER since 2015. During the 2020 COVID-19 bubble, it even exceeded 40 times. Bloomberg pointed out, “The PER of the top 5 companies in the S&P 500 is less than half of the PER of the top 5 companies by market capitalization during the early 2000 dot-com bubble.”

Bank of America (BoA) is one of the most optimistic long-position holders on Wall Street. BoA strategist Savita Subramanian said, “The rally in the US stock market that started last year is steeper than ever, but it does not meet the conditions of past boom and bust cycles characterized by a large gap between stock prices and value or excessive leverage usage.” BoA raised its year-end target for the S&P 500 index to 5400, the highest on Wall Street, last week, citing strong corporate earnings and a soft landing for the economy. This implies that the S&P 500 index has about 5% more room to rise from its current level.

According to BoA’s sell-side indicators, the current US stock market strength is similar to the “neutral zone” in 1995 when the dot-com bubble was expanding and stock prices were rising. The full-fledged dot-com bubble burst five years later. BoA also suggested that the stock market strength centered on AI and GLP-1 obesity treatments could spread to broader sectors.

Leading global investment banks (IBs) such as JP Morgan and Goldman Sachs also stated that the M7’s valuation is not overvalued.

JP Morgan strategist Mislav Matejka said in an investment memo on the 11th, “The 5-year average valuation of the M7, which led the rally, is lower than that of the rest of the S&P 500.” Goldman Sachs explained that although market concentration is at its highest in decades, the top stocks are trading at valuations much lower than during the peak of the tech bubble.

Scott Kroner of Citigroup emphasized, “The M7 accounts for 20% of the S&P 500 companies’ net earnings, which justifies them accounting for one-third of the market capitalization,” adding, “There is ample room for further price increases in M7 stocks.”