According to research analysts at Bank of America, the S&P 500 remains statistically expensive compared to historical norms across various metrics.
However, the analysts argue that this comparison might not be entirely fair, considering the significant structural changes in today's index compared to previous decades.
The modern S&P 500 is characterized by lower leverage, a greater emphasis on asset-light businesses, a higher proportion of high-margin sectors, and reduced earnings volatility. Additionally, Bank of America's analysts hold a contrarian view regarding the equity risk premium, suggesting that it could potentially decline further.
The BofA note highlights several factors that have contributed to this outlook, including the resolution of significant challenges such as the pandemic, geopolitical conflicts, and interest rate fluctuations. Furthermore, the analysts point to ongoing trends such as improving real wage growth and resilient consumer spending supported by strong balance sheets and efficient corporate practices.
Overall, while valuation metrics may indicate the S&P 500's expensive nature, Bank of America's analysis suggests that broader structural changes and favorable economic conditions could justify current market levels.