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He S&P 500 has been on fire in recent years. Since bottoming in March 2020 during the pandemic, the index has returned an astonishing 158% (not including dividends).
There have been many reasons for this rise, ranging from enthusiasm for artificial intelligence (ai) and falling interest rates to optimism about the outcome of the US election.
The S&P 500 is now in the third year of its current bull market.
However, valuations have become overblown and a growing number of market observers are starting to sound the alarm. Given all this, would it be really crazy for me to invest in the S&P 500 right now?
Bull market cycle
Growth investor Sir John Templeton once said: “Bull markets are born from pessimism, grow from skepticism, mature from optimism, and die from euphoria..”
Going back, I think we can see in general terms how these stages play out:
- Pessimism: At the end of 2022, the bull market began following the devastating financial and public health impact of the pandemic.
- Skepticism: In 2023, concerns remained about high inflation, supply chain disruptions and geopolitical tensions. However, the S&P 500 continued to rise.
- Optimism: The S&P 500 hit a new high in early 2024, boosted by 'Magnificent Seven' tech stocks and the disruptive potential of ai.
- Euphoria: Donald Trump is elected and promises pro-growth policies, deregulation and tax cuts. The S&P 500 shoots above 6,000 points for the first time in history.
brave bulls
But are we really in the last stage of euphoria? After all, the average bull market lasts more than two or three years (in fact, about five on average).
No one knows for sure what will happen next. But the index's price-to-earnings (P/E) ratio is now approaching 30. This is not far from the peak reached during the dot-com bubble, a period of excessive speculation in technology stocks that did not end well.
He FTSE 100 The index is not an apples-to-apples comparison with the S&P 500 because it lacks giant technology companies that have higher valuation multiples. Still, a P/E ratio of almost 30 seems extreme compared to the FTSE 100's 15.
Looking around, I see some crazy individual valuations. Palantir TechnologiesFor example, it trades with a price-to-sales (P/S) ratio of 54 and a forward P/E multiple of 128.
Meanwhile, tesla The stock is up 41% in a month, putting it at a forward price-to-earnings ratio of 93. Even Tesla bulls are scratching their heads at the magnitude of this rapid rise!
Total madness?
He Vanguard S&P 500 UCITS ETF (LSE: VUSA) is the most popular exchange-traded fund (ETF) among investors Hargreaves Lansdown. Given the stellar performance of the index, this is not surprising.
About a third of my portfolio is invested in S&P 500 companies and I'm happy with that allocation.
However, if this were not the case, I don't think it would be foolish of me to buy a small portion of this S&P 500 tracker right now. But only assuming you were committed to investing for years instead of months.
After all, a sharp pullback could be around the corner given the historically high valuation.
However, in the long term I think the technology stocks that dominate the index have a lot of potential. We are living through a powerful digital/ai revolution, and the companies at the center of it are all in the S&P 500.
