Bank of America says the S&P 500 is expensive on all 20 metrics it tracks

Bank of America equity strategist Savita Subramanian acknowledges the S&P 500's elevated valuation at 21x forward earnings, 35% above its historical average, but argues that this premium is justified due to the index's compositional shift towards higher-quality, higher-margin companies with lower leverage and earnings volatility compared to its historical makeup. Subramanian also highlights the U.S. market's superior growth potential, balance sheets, and structural advantages like energy independence and the dollar's reserve currency status relative to Asia and Europe, favoring communication services, utility, and technology sectors.

Analysis

Bank of America's equity and quant strategist, Savita Subramanian, reports that the S&P 500, despite appearing "statistically expensive" on all 20 tracked valuation metrics and trading at 21 times forward earnings (approximately 35% above its historical average following a relief rally post-tariff policy announcements), may not be overvalued when considering its evolved composition. Subramanian argues that comparing the current index to its historical self is an "apples-to-oranges" scenario because asset-intensive manufacturing now constitutes less than 20% of the index, down from almost 70% in 1980. This shift has resulted in a higher quality S&P 500 with enhanced margins, reduced leverage, and lower earnings volatility. The U.S. stock market's premium to global markets is considered "likely justified" due to its "statistically superior" quality, balance sheets, growth potential, and risk profile. The U.S. is forecasted to offer roughly double the long-term growth potential of Asia and Europe, with lower earnings volatility than Europe, superior free cash flow per share, and a lower percentage of non-earners. Additional U.S. "structural advantages" cited include energy independence, the dollar's reserve currency status, "unparalleled liquidity," and the current strength of the U.S. tech sector. The S&P 500 is noted to be up around 2% in 2025 year-to-date. Bank of America's models currently favor the communication services, utility, and technology sectors within the U.S. market.

Key Decisions for Investors

• Investors should consider that the S&P 500's current elevated valuation at 21 times forward earnings may be substantiated by fundamental shifts in the index's composition towards higher-quality companies with stronger financial metrics and growth prospects compared to historical benchmarks.
• A strategic allocation towards U.S. equities could be maintained or initiated, particularly within the communication services, utility, and technology sectors, given Bank of America's positive outlook based on superior U.S. growth potential and structural market advantages relative to other global regions.
• Monitor ongoing U.S. corporate earnings reports, margin trends, and macroeconomic data to ensure the persistence of the 'statistically superior' fundamentals that currently justify the market's premium valuation, as any deterioration could signal a need to reassess market exposure.