Vanguard S&P 500 ETF Hits ATH—Why It’s Still a Steal (Yes, Really)
The Vanguard S&P 500 ETF just smashed records—again. But before you dismiss it as overpriced hype, here’s the twist: it’s still trading at a discount to its real value. Wall Street’s favorite tracker isn’t just riding the bull market; it’s outsmarting it.
### The Illusion of ‘Expensive’
P/E ratios? Meh. The ETF’s underlying holdings—tech titans, cash-printing consumer giants—are growing earnings faster than the market’s pricing in. Translation: today’s ATH could be tomorrow’s bargain basement.
### Liquidity Wins, Always
While crypto bros chase 100x shitcoins, this ETF offers something radical: stability. Tight spreads, zero liquidity crunches—just boring, beautiful compounding. (Take notes, meme-stock traders.)
### The Cynic’s Corner
Sure, it won’t make you a overnight billionaire—unless you’re a hedge fund manager skimming fees. But for the rest of us? It’s the closest thing to free money in a rigged system.
Image source: Getty Images.
Understanding the S&P 500's valuation
One simple way to measure the S&P 500's valuation is to look at the price appreciation of the index compared to changes in its operating earnings per share (EPS). Operating earnings can be a better metric for tracking the valuation of the S&P 500 because they exclude one-time charges or gains that don't accurately represent the performance of the underlying businesses.
Here's a look at how the S&P 500 has traded in comparison to its operating EPS over different intervals.
|
Level |
10.7% |
77.9% |
89.7% |
232.3% |
382.4% |
|
Operating EPS |
3.5% |
21.6% |
61.5% |
140.6% |
268.3% |
Data source: YCharts.
As you can see in the table, the S&P 500 is rising faster than operating earnings, which has expanded its valuation. Overall, the businesses that make up the S&P 500 are relatively expensive based on their performance.
Another way of looking at S&P 500 valuation is forward earnings projections. The forward price-to-earnings (P/E) ratio of the S&P 500 takes the current price and divides it by analyst consensus estimates for earnings over the next year rather than the trailing 12 months.
According to data from FactSet from Aug. 1, the forward P/E ratio of the S&P 500 is 22.2 compared to a five-year average forward P/E of 19.9 and a 10-year average forward P/E of 18.5. So the S&P 500 commands a 20% premium to its 10-year average. On the surface, it looks like the index is massively overvalued. However, the valuation of the S&P 500 and companies in general should arguably go up over time as companies become more efficient.
In defense of valuation expansion
The internet and the instant transfer of information have made doing business much more efficient. Just think about the time savings from sending an email versus a fax or hopping on a video call instead of traveling to meet in person. Then, there is also the transition from having several analog devices performing independent tasks -- like an alarm clock or calculator -- to having many tools available at arm's reach, all on a single mobile phone.
Artificial intelligence (AI) should further increase worker productivity, and in turn, boost company performance. As companies across industries become better businesses, the overall valuation of the market should steadily tick higher.
It is natural for the valuation of the S&P 500 to rise over time as growth-focused companies make up a larger portion of the index. Companies that reinvest their profits rather than distributing them to shareholders through buybacks and dividends should command higher valuations as those investments generate returns.
Pros and cons of a growth-oriented stock market
It's not the best idea to glance at what the valuation of the S&P 500 is today versus the average of the last decade and hastily assume the S&P 500 is overvalued without considering the valid reasons why the index is more expensive. By the same token, it's a mistake to gloss over the risks of today's market.
Growth-driven companies have increased the quality of S&P 500 earnings and the projected growth rate, but they can also boost market volatility. A cyclical downturn in investment in the tech sector WOULD have a sizable impact on the S&P 500, more so than when tech had a lower weight in the index.
All told, the S&P 500 deserves to have a higher than historical valuation, so the ETFs that track the index aren't as expensive as they seem. However, don't be surprised if the index makes sharper moves to the upside and the downside, given its composition.
