Wells Fargo strategists said Wednesday the S&P 500 valuations appear “stretched by most measures,” including the widely followed price-to-earnings (P/E) ratio.
However, this does not mean prices cannot rally further, analysts said.
In their commentary, analysts drew a comparison between current stock valuations and those during the peak of the Tech bubble in March 2000, highlighting a notable difference in the quality of companies leading the market rally now versus then.
Today, companies driving the rally are characterized by strong revenue and earnings growth, robust balance sheets, and acceptable debt levels.
"P/E ratios are not a timing tool. Stocks are richly valued but prices could go higher. We expect increased volatility in coming quarters that may provide downside opportunities to increase exposure to stocks at more reasonable valuations," analysts wrote.
They pointed out that the SPX is trading at a P/E of 22.4x based on a 2024 earnings per share (EPS) estimate of $230. This is compared to a P/E of 27x at the peak of the market in March 2000.
Analysts advised investors to trim their exposures in overvalued sectors like Information Technology, Communication Services, and Consumer Discretionary, and reallocate those funds to sectors like Industrials, Energy, Materials, and Health Care, all of which are rated ‘favorable’ at Wells Fargo.