US Stock Market Valuation and Performance Analysis in Current Environment

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Even though the US stock market has rebounded by almost 2-3% near its recent highs over the past two weeks, it remains a highly differentiated market, somewhat resembling the scenarios mentioned in 2000 and during the 'Nifty Fifty' era in 1973-74.

Currently, the S&P 500's P/E ratio is 22x, projected to be 20x next year, which doesn't seem cheap. However, the average P/E of the seven largest US companies is 37x this year (bulls might argue that with fast growth, their P/E ratios will quickly drop next year, but some of these companies' P/E ratios have been entangled for over a decade, and most have traded around 10x P/E). Excluding these companies, the remaining 493 companies have an average P/E ratio of 17x based on their market value weights, making the US stock market's valuation seem more reasonable.

Digging deeper, some of these 493 companies have particularly absurd valuations, with significant market caps, such as Costco near $400 billion, Chipotle Mexican Grill near $100 billion, Transdigm close to $80 billion, and smaller ones like FICO at $40 billion. If we consider an equally weighted P/E ratio for these 493 companies, it falls below 16x.

During the earnings season, apart from the overall bullish sentiment towards the banking sector and some individual stocks, many non-popular stocks within my coverage range have shown average performance. Several have guided their earnings to the lower half of previous ranges, reflecting lukewarm performance with a P/E ratio below 16x.

Overall, more than half of the S&P's 17%+ gain this year has been driven by several large tech companies and momentum stocks. They appear to be crucial for the S&P's ability to significantly outperform the average 8-10% returns over the past two centuries (as the rest of the stocks as a whole are considered fairly priced). To hedge against the S&P, one would essentially be hedging against artificial intelligence and momentum trading.