The U.S. stock market has been soaring in the first half of the year, and the "seven giants" have gone crazy. Experts say the valuation is at a rare high in 30 years!

On the other hand, the S&P 500 index may not be the best measure of the market, as it is gradually dominated by a few large technology companies. The so-called "seven giants", the seven largest stocks in the S&P 500 index, have led most of the rally so far this year and are also one of the most expensive stocks in the index.

Investors have raised a question:Is the U.S. stock market really expensive, or is it just because a few companies have inflated the valuation of the S&P 500 index that it appears so expensive?

Despite numerous warnings in recent years that the stock market will experience a massive bubble and imminent collapse (which seemed to be prescient during the stock sell-off last year), the market has never become cheap.

By the end of 2022, based on the expected earnings for this fiscal year, the forward P/E ratio of the S&P 500 index is 23, slightly higher than the average forward P/E ratio at the start of the 1990 data series. Now, it appears that the price of the S&P 500 index has risen significantly, with a P/E ratio close to 28, a level that was only exceeded during the late 1990s dot-com era and again in the early 2000s.

Not all stocks in the S&P 500 index have equal representation.Due to the market-cap weighting of the index constituents, it favors the largest companies.

The seven giants, namely Apple, Microsoft, Google parent company Alphabet, Amazon, Nvidia, Tesla, and Meta, currently account for nearly 30% of the S&P 500 index. It should not be ignored that they are also the big winners this year. Nvidia and Meta are the top-performing stocks in the S&P 500 index this year.

Tesla ranks fifth, while the other four are all in the top ten percent. The prices of these seven giants have never been cheap, but this year's surge has pushed them to rare levels. Their average P/E ratio is 43, nearly twice the average P/E ratio of other companies in the field, which is 25.

Firstly, the largest companies are not always the most expensive. Since 1990, the average P/E ratio of the top seven companies has been higher than the field about half the time. As for the other half, the valuation gap between the top seven and the field soared to a record level in 2020, and has since declined, although it is still comparable to the peak of the 1999 dot-com bubble.

So theoretically, after excluding the seven giants, the market will be cheaper, and indeed it is, although not as cheap as you imagine.

To make a similar comparison, Kaiser calculated the weighted average P/E ratio of the S&P 500 index every year since 1990, including and excluding the seven largest stocks by market cap.These numbers confirm that when excluding the seven largest stocks, the current P/E ratio of the index decreases from 28 to 24.

However, this does not mean that the performance of government bonds will be better than stocks. In the long run, they almost certainly won't. But some investors prefer to hold cash until short-term interest rates or stock valuations decline, which may help explain the significant inflow of funds into money market funds this year. If enough investors choose cash, be aware of a decline in stock valuations.

So, the largest companies are expensive, and they are driving up the valuations of broad market indices like the S&P 500. But other companies in this sector are also expensive, and there is no way to blame it on the seven major companies.