S&P 500 is expensive 'on almost any valuation metric': BofA's Subramanian

Investing.com -- Bank of America's Savita Subramanian raised concerns about the current valuation of the S&P 500 , describing it as expensive by historical standards. 

“On almost any valuation metric, the S&P 500 trades at statistically expensive levels vs history,” said Subramanian in a note Friday.

She highlighted the equity risk premium (ERP), which is the extra return investors require for holding stocks over risk-free assets, is at a historically low level.

Subramanian noted that the ERP is currently less than 200 basis points, compared to an average of around 500 basis points over the past decade.

 "If the equity risk premium were to mean-revert to its long-term average, the index would drop by 50%, all else equal," she warned. 

However, Subramanian argues that the ERP should be lower in today's market due to the changing composition of the S&P 500. 

Unlike the asset-intensive manufacturing companies that dominated the index in the 70s and 80s, BofA says today’s S&P 500 is heavily weighted towards asset-light sectors such as technology, media, and healthcare. 

"The S&P 500 is a different animal than in prior cycles," Subramanian wrote, adding that leverage is also lower compared to most prior cycles.

Furthermore, Subramanian observed parallels between the current market environment and the efficiency boom of the 80s and 90s. 

"Companies adapted to more expensive input costs by efficiency spend," she explained, citing improvements in productivity and efficiency.

Subramanian also pointed out the potential for further gains in efficiency, particularly through technological advancements like automation and generative AI. 

These improvements could enhance earnings visibility and reduce volatility, as "replacing people with processes improves EPS visibility."

Despite the high valuations, Subramanian sees potential for continued efficiency-driven growth in the S&P 500, particularly in sectors like financials that stand to benefit from regulatory easing and technological innovation.

 

Source: Investing.com