Bargains are scarce for investors in this market
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Sky-high valuations may have started as a Big Tech problem, but it's getting harder to find undervalued opportunities in an increasingly expensive stock market.
Why it matters: Investors with concerns about froth are looking to rotate out of expensive corners of the market. They may not find much.
What they're saying: Markets are "starting to run out of room," Lori Calvasina, the head of U.S. equity strategy at RBC Capital Markets, tells Axios. "Those nooks and crannies (investors) can go to kind of suck out the remaining valuation opportunity, it just seems like that's starting to dry up."
Driving the news: The Dow Jones Industrial Average hit its first record high of 2025 driven in part by UnitedHealth.
- On the news that Warren Buffett's Berkshire Hathaway had taken a stake, the battered shares of UnitedHealth rallied on Friday and Monday before retreating yesterday.
- Its bounce back highlights the recent move into stocks that had appeared oversold. Indeed, investors have been piling into formerly forlorn sectors, like health care, consumer discretionary and materials.
- Such a trading strategy, known as a rotation, comes as valuations for both the biggest market cap names and the S&P 500 on a market cap basis are closing in on past highs, according to RBC.
Zoom in: Yet it's not just Big Tech that has gotten expensive, Calvasina says.
- Even small-cap valuations are "getting elevated," though they are not at the "tip-top" of froth just yet, she notes. Equal-weighted S&P 500 valuations are getting close to peaks on a market cap basis as well.
- Price-to-earnings ratios on the Russell 2000 and the equal-weighted S&P don't leave "a ton of room" for the rotation trade going forward, she says.
What we're watching: A market that toppy could fall over at the slightest gust of wind. That catalyst could come in the form of:
- Fewer rate cuts than the market is expecting.
- Tariffs putting broader pressure on earnings.
- Cracks showing up in the labor market.
- Inflation that stays higher for longer.
Yes, but: Any one of those challenges could simply cause a garden-variety pullback of 5% to 10%, which arguably would be healthy. Still, coming into those headwinds at such high valuations leaves investors at a higher risk.
Be smart: If everything is priced for perfection, the market is more vulnerable to any weakness leading to a broader pullback.
