Outside of Magnificent 7, market valuations are stretched
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The news that Nvidia is being investigated by Chinese antitrust authorities helped to depress the S&P 500 on Monday. Some stock analysts, however, are worried less about the volatility in megacaps and more about stretched valuations everywhere else in the market.
Why it matters: The valuation of the S&P 500 is very concentrated in a handful of tech stocks. But those "Magnificent 7" companies are mostly trading at valuations they've seen before. It's the rest of the market that's in uncharted territory.
By the numbers: The forward P/E ratio of the 493 stocks in the S&P 500 that aren't the Magnificent 7 stands at 19.8, per Citigroup. That's unprecedented over the past 20 years.
- The Magnificent 7 are collectively trading at a higher forward P/E of 30.8, but that's only about the 90th percentile of where they've traded since 2004. They were more richly valued, for instance, for most of 2020 and 2021.
Where it stands: While "down drafts are likely from the current valuation levels," Citi says, "the Magnificent 7 is not completely to blame for this setup."
Yes, but: The pressure on Nvidia isn't going away anytime soon, and even if it's not the market's main problem, it's still important.
- As tensions rise between the U.S. and China over trade, tariffs and technology policy, Nvidia finds itself an obvious — and important — pawn.
- Nvidia's fate is one more headline risk the incoming administration, which is very focused on market performance, will have to address.
The bottom line: Citi still sees the S&P gaining ground in 2025, ending the year at 6,500, up about 7% from its current levels.
- That said, the downside is bigger than the upside. Their "bull case" is 6,900, up 14%, while their "bear case" is 5,100, down 16%.
