Wall Street is experiencing near-euphoria as investors pour record sums into major corporations, driving the S&P 500 to historic highs. However, this surge has its downside: companies are now valued at unprecedented levels, with the price-to-sales ratio exceeding 3.23—even higher than during the dot-com boom.
Tech giants like Nvidia and Microsoft account for a large share of the index's capitalization. The ten largest companies now represent about 40% of the S&P 500, with nine valued at over a trillion dollars. This makes the index heavily dependent on the performance of a small group of leaders.
Analysts note that the market is fueled not only by earned profits but also high expectations for future gains. The current P/E ratio is 22.5 compared to the decade average of around 17, reflecting significant optimism in pricing.
Any negative news or increased government regulation could trigger a broader market decline. For example, in April, statements by Donald Trump about new tariffs sparked a sell-off in the technology sector.
Some experts point to the growth potential in lesser-known companies that have not yet reached high valuations and recommend alternative investments like land.
The problem of overvaluation mainly concerns the top group of companies, while most S&P 500 firms remain moderately valued. However, the dominance of large players increases market risks, highlighting the need for portfolio diversification.
Thus, the current market rise is based on the financial success of a narrow circle of companies. Experts advise not to focus solely on trendy stocks, but also consider mid-sized and smaller firms with growth potential, while taking risks into account in investment strategies.
