S&P 500 valuation anxiety shifts! Profit growth lags behind stock price gains, signs of a bubble emerging in non-tech sectors.

In recent weeks, investors have become increasingly worried that the continuous record highs of the S&P 500 index may lead to a bubble, with the most commonly cited concern being the index's high valuation. Critics point out that the rise of the S&P 500 index this year has been largely driven by the technology sector, with just five mega-cap tech stocks contributing half of the index's 12% gain from the beginning of the year until now. However, the profit growth of these tech giants has exceeded the rise in stock prices, largely proving that their high valuations are justified. Seaport Research Partners states that other parts of the market are starting to look somewhat overvalued. Data compiled by Bloomberg Intelligence shows that the S&P 500 index excluding the technology sector has risen by 13% in the past year, but profits have only increased by 6.4%. In contrast, the S&P 500 Information Technology Index has risen by 27%, which appears more restrained when compared to the sector's profit growth of 26.9%. After the impressive earnings reports of large tech stocks overshadowed worrying trends in other sectors, market anxiety is shifting. The materials sector, primarily composed of chemical manufacturers and mining companies, has risen by 9% this year, but profits have decreased by 13%. One notable example is Dow, Inc. (DOW.US), which currently has the highest valuation in the entire S&P 500 index with a staggering price-to-earnings ratio of 914. Jonathan Golub, Managing Director and Chief Equity Strategist at Seaport Research Partners, said, "Where is the speculation? It's not in tech stocks, but in non-tech stocks." Currently, the forward price-to-earnings ratio of the S&P 500 index is over 27 times, a level typically seen in extremely bullish markets. Valuations of tech stocks are also high, for example, with Oracle Corporation (ORCL.US) and Broadcom Inc. (AVGO.US) having price-to-earnings ratios of 67 and 86 respectively, which is indeed concerning. However, the "Big Seven" of US stocks including NVIDIA Corporation (NVDA.US), Microsoft Corporation (MSFT.US), Meta (META.US), and Alphabet (GOOGL.US) experienced a 7.9% decrease in price-to-earnings ratio in 2025, while their stock prices rose by 18%. Although the group's price-to-earnings ratio remains at 43 times, higher than the overall market, the expected 20% profit growth in the next 12 months may to some extent support this price level. Seaport Research Partners' data also indicates a similar situation for broader tech stocks and companies with higher tech weightings. Veteran investment strategist Jim Paulsen believes that stocks in the S&P 500 index outside of tech stocks show more signs of a bubble, with their profit growth lagging behind stock performance to a significant extent. Some sectors' companies have stock prices far above historical levels, but are not showing remarkable profit growth. For example, the industrial sector and consumer discretionary sector price-to-earnings ratios have risen by 17% and 15% respectively this year, greatly outpacing their profit growth. Jim Paulsen said, "In this bull market cycle, profits have largely concentrated in the information technology companies. It might be tempting to say that the new age companies are not truly deserving of their current high valuations, but part of the reason they have grown to this size in this bull market is due to their 'huge fundamental performance.'" However, concerns about overall valuations, especially tech valuations, still persist in the long term. Ed Clissold, Chief US Strategist at Ned Davis Research, pointed out that since the bear market low in 2022, the S&P 500 index has risen by 83%, while profits have only increased by 16%. Nevertheless, Ed Clissold also noted that high valuations are not limited to the tech sector, as even excluding mega-cap companies, the "average stock is expensive," and "the cheapest stocks are also expensive."