According to DataTrek Research co-founder Nicholas Colas, significant shifts within the S&P 500 over the past four to eight years have contributed to its current high valuation compared to 2016.
Big Tech stocks, including Nvidia, Meta, and Tesla, surged on Election Day 2024, with the S&P 500 closing 1.2% higher as Americans voted for the next U.S. president.
Colas highlighted that the S&P 500’s price-to-earnings (P/E) ratio is now notably higher than in 2016 but aligns closely with 2020 levels. This shift has been driven by increased fiscal and monetary stimulus and a stronger emphasis on technology stocks, which now represent a larger portion of the index.
For instance, Nvidia’s weighting has jumped from 0.7% in 2016 to 6.9% due to investor interest in AI, while the tech sector overall has grown from 21.4% to 31.7%.
Dominic Rizzo, a portfolio manager for the T. Rowe Price Technology ETF, also emphasized the importance of technology and tech-adjacent companies within the S&P 500.
The “Magnificent Seven” — top tech players like Apple, Microsoft, Amazon, and Meta — collectively account for a substantial 43.2% of the S&P 500, up from 27.7% in 2016.
The increased weight and influence of big tech stocks have made valuations critical for investors. DataTrek’s analysis indicates that tech valuations, such as Nvidia’s at 40 times forward earnings, remain robust despite high interest rates.
Colas pointed out that contrary to predictions, tech valuations have expanded more than any other sector relative to long-term averages.
