Concern over Market Valuations

Aggregate stock market valuation ratios have not been strong predictors of broad market returns. And yet, high stock valuations sit near the top of concerns cited by investors about the state of equity markets. However, this perception stems from a subset of stocks, and investors should be careful not to throw the baby out with the bathwater by ascribing this characteristic to the global stock market.

The poster child for high valuations—the so-called Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla)—had an aggregate price-to-book (P/ B) ratio of 11.89 as of September 30 (despite six of the seven having lower proftability than the S&P 500 index). To put that in perspective, the average for the US market over the past 30 years is 3.05.

These stocks helped push up the P/B ratio of the tech-heavy Nasdaq Composite to 5.21. But broader market indices, especially those with non-US stocks, have substantially lower valuations. For example, the global MSCI All Country World IMI Index P/B is less than half that of the Nasdaq.

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Robert J. Pyle, CFP®, CFA, AEP® founded Diversified Asset Management, Inc., in 1996 to provide personalized, comprehensive wealth management services to successful individuals, families, single women, and business owners. His specialty is addressing the complex financial needs of self-employed professionals, corporate executives, and small-business owners. Our disclosure can be found here. The views, opinion, information, and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting, or tax advice.