Are stocks too expensive?

This is one of the key charts from Bank of America's latest survey of fund managers. A record number of them believe that stocks are overvalued. This is not surprising, as US stocks, which account for the bulk of global market capitalization, are indeed trading at historically high valuations. But does that mean that they are too expensive?

For once, investors are consistent: stock valuations are at record levels and a record number of investors believe that stocks are overvalued. 58% according to the latest survey of Bank of America managers.

Before analyzing this in more detail, one point needs to be clarified. The Bank of America survey concerns global equity markets, but in reality we are talking about US stocks. This is because they dominate everything else, both in terms of media coverage and their weighting in global indices (the US accounts for 72% of the MSCI World Index). Hence the reference to the S&P 500 in the rest of this article.

All about the Mag 7

According to Factset data, the forward P/E ratio of the S&P 500 is currently 22.5x. This is the highest level since the bubble of the 2000s (excluding the Covid period, when valuations were higher, but only because analysts had slashed their earnings estimates).

These valuations are mainly due to the weight of the Magnificent Seven, which represent 34% of the index according to the latest estimates by MarketScreener's macro research teams.

These are stocks that are showing very strong earnings momentum because they are currently the main beneficiaries of AI. Earnings growth coupled with stratospheric margin levels justify current valuation levels.

2026 EPS estimate revisions. Earnings momentum is still on the side of the Magnificent Seven. Source: Torsten Slok

Stop or go?

As long as these stocks continue to deliver, as they say, the valuations are justified. The big question, which no one can answer with certainty today, is whether Capex will pay off. To summarize the issue, the capital expenditures of the four hyperscalers (Alphabet, Meta, Microsoft, Amazon) are expected to total $361bn for FY 2025 alone.

Returning to the starting point of this article, investors believe that stocks are overvalued. Fair enough. But at the end of the day, what matters is not so much what investors say, but rather what they do. And judging by the record highs of the US indices that we comment on each week, the majority of them continue to buy stocks.