Would it be pure madness to pile into the S&P 500?

The S&P 500 has been on hearth lately. Since bottoming out in March 2020 in the course of the pandemic, the index has returned an astonishing 158% (not together with dividends).

There have been many causes for this surge, starting from synthetic intelligence (AI) pleasure and falling rates of interest to bullishness in regards to the US election end result.

The S&P 500 is now into the third 12 months of its present bull market.

Nonetheless, valuations have turn out to be stretched and an rising variety of market watchers are beginning to sound the alarm. Given all this, wouldn’t it be sheer insanity for me to put money into the S&P 500 proper now?

Bull market cycle

Development investor Sir John Templeton as soon as mentioned: “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.”

Stepping again, I feel we are able to broadly see these levels enjoying out:

• Pessimism: in late 2022, the bull market began after the devastating monetary and public well being influence of the pandemic.
• Skepticism: in 2023, considerations remained about excessive inflation, provide chain disruptions, and geopolitical tensions. But the S&P 500 continued to rise.
• Optimism: the S&P 500 reached a brand new file excessive in early 2024, pushed by the ‘Magnificent Seven’ tech shares and the revolutionary potential of AI.
• Euphoria: Donald Trump is elected, promising pro-growth insurance policies, deregulation and tax cuts. The S&P 500 shoots above 6,000 for the primary time in historical past.

Raging bulls

However are we actually in late-stage euphoria? In spite of everything, the common bull market lasts longer than two or three years (round 5, on common, in actual fact).

No person actually is aware of for sure what occurs subsequent. However the index’s price-to-earnings (P/E) ratio is now approaching 30. This isn’t far off the height reached in the course of the dot-com bubble, a interval of extreme hypothesis in tech shares that didn’t finish effectively.

The FTSE 100 index isn’t an apples-to-apples comparability to the S&P 500 as a result of it lacks big tech corporations that command greater valuation multiples. Nonetheless, a P/E ratio of practically 30 seems excessive subsequent to the FTSE 100’s 15.

Wanting round, I see some loopy particular person valuations. Palantir Applied sciences, for instance, is buying and selling on a price-to-sales (P/S) ratio of 54 and a ahead P/E a number of of 128.

In the meantime, Tesla inventory has jumped 41% in a month, placing it on a ahead P/E ratio of 93. Even Tesla bulls are scratching their heads on the magnitude of this fast rise!

Utter insanity?

The Vanguard S&P 500 UCITS ETF (LSE: VUSA) is the preferred exchange-traded fund (ETF) amongst buyers at Hargreaves Lansdown. Given the index’s stellar efficiency, that’s hardly stunning.

Round a 3rd of my portfolio is invested in S&P 500 corporations, and I’m pleased with that allocation.

If this wasn’t the case although, I don’t assume it’d be foolish for me to purchase a small slice of this S&P 500 tracker proper now. However solely assuming I used to be dedicated to investing for years somewhat than months.

In spite of everything, a pointy pullback might be simply across the nook given the traditionally excessive valuation.

Long term, nevertheless, I feel the tech shares dominating the index have tonnes of potential. We’re residing by way of a robust digital/AI revolution, and the businesses on the very centre of it are all within the S&P 500.