Chart of the week: Is the price right?

Data-driven insights and analysis from our investment team every week.

Our chart of the week shows the prospective price-to-earnings multiples of the S&P 500 Index, the S&P 500 Equal Weighted Index, and the STOXX Europe 600 Index. Obviously, the S&P 500 valuation of 22x 2026 forecast earnings is at the high end of the recent range. It is being pulled higher by the valuations of the mega-cap IT and related stocks. We have noted previously how recent absolute returns and outperformance of the Magnificent 6 (Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia, but excluding Tesla due to its more extreme and volatile valuation), have been driven by earnings growth, rather than multiple expansion.

Excluding the Magnificent-7, the S&P 500 is trading on 19.4x 2026 forecast earnings. The S&P 500 Equal Weighted Index valuation at 16.5x 2026 earnings is in line with the historic median valuation of the last 10 years. Similarly, the STOXX Europe 600 is trading on 14.6x 2026 earnings forecasts, in line with its recent history. Undoubtedly, speculative elements related to the AI innovation and investment cycles exist within financial markets, and the investment cycle is impacting the broader economy. We do not pretend to know the future profitability of the ongoing AI investments. Nonetheless, based on the broader valuation metrics referred to above, we do not believe that global equity valuations are broadly detached from fundamentals.