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What Makes the S&P 500 so Expensive?

In Astoria’s recent research piece, “Once in a Decade Opportunity to Diversify Away From the ‘Magnificent Seven,’” from Nicholas Cerbone, CFA, is a section titled ‘What Makes the S&P 500 so Expensive.’

Recent data from Bespoke shows the S&P 500 has a PE ratio of 19 compared to the S&P 500 equal-weighted index PE of 15.

The primary factor driving the elevated valuation of the market-cap-weighted S&P 500 is the dominance of the mega-cap stocks leading the index.

  • All 10 of the largest stocks in the index trade at a higher multiple than the median of the remaining 490 companies (17x).

  • 9 of the top 10 record a PE over 20.

  • The top 10 make up approximately 31% of the index.

It would be prudent for investors to pay close attention to this concentration risk. Other historical instances that exhibited similar concentration levels among the leading 10 stocks have been followed by significant market declines.

  • ~34% concentration level in 1972 was followed by a 21-month bear market starting in January 1973. The S&P 500 declined by 48%.

  • ~28% concentration level in 2000 was followed by a 31-month bear market starting in March 2000. The S&P 500 declined by 49%.

Astoria does not suggest that investors expect a decline of the same magnitude, but it is reasonable to anticipate a mean reversion. There are many ETFs and products that use market-cap weighting. You may want to look under the hood to see how much overlap they have in a portfolio and how much of the equity exposure is ultimately allocated to mega-cap stocks.

One way that investors can mitigate the concentration risk associated with portfolios while maintaining exposure to large caps is by utilizing equal-weighted strategies.

Astoria utilizes an equal-weighted quality strategy to invest in high-quality companies in the mid/large-cap space. Equal-weight strategies like the Eq. weight S&P 500 have shown the potential for outperformance. The eq.-weight S&P 500 index has outperformed the S&P 500 index by 678% since its inception in 1989 (past performance does not indicate future results).

Source: Bloomberg. Data as of October 6, 2023.

Contact me if you want to learn about how Astoria mitigates concentration risk and how we are strategically positioning our portfolios in this market environment.



Warranties & Disclaimers

As of the time of this publication, Astoria Portfolio Advisors held positions in SPY, AAPL, MSFT, GOOGL, NVDA, META, LLY, and V on behalf of its clients. There are no warranties implied. Past performance is not indicative of future results. Information presented herein is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. The returns in this report are based on data from frequently used indices and ETFs. This information contained herein has been prepared by Astoria Portfolio Advisors LLC on the basis of publicly available information, internally developed data, and other third-party sources believed to be reliable. Astoria Portfolio Advisors LLC has not sought to independently verify information obtained from public and third-party sources and makes no representations or warranties as to the accuracy, completeness, or reliability of such information. Astoria Portfolio Advisors LLC is a registered investment adviser located in New York. Astoria Portfolio Advisors LLC may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements.


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