The US stock market in the first half of the year was overheated, and the “Big Seven” rose insanely, and experts say the valuation hit a rare high in 30 years!

On the other hand, the S&P 500 is probably not the best indicator to measure the market, as it is gradually being guided by a few big tech companies. The so-called “Big Seven”, the seven stocks with the largest market capitalization in the S&P 500 index, have led most of the gains so far this year, and are currently one of the most expensive stocks in the index.

Investors have raised one question after another:Is the US stock market really expensive, or is it just because a few companies have raised the valuation of the S&P 500 that it seems so expensive?

Despite numerous warnings in recent years about a huge bubble and imminent collapse in the stock market (which seemed prescient when the stock market sold off last year), the market has never become cheap.

By the end of 2022, based on expected earnings for the current fiscal year, the S&P 500 index had a forward price-earnings ratio of 23, slightly higher than the average forward price-earnings ratio at the beginning of the 1990 data series. Today, the price of the S&P 500 index has risen markedly, and its price-earnings ratio is close to 28 times. This level was only surpassed in the Internet era in the late 1990s and once again at the beginning of this century.

Not all stocks in the S&P 500 are equally representative.Since the components of this index are weighted by market capitalization, it favors the largest companies.

The Big Seven, namely Apple, Microsoft, Google's parent company Alphabet, Amazon, Nvidia (Nvidia), Tesla, and Meta, currently account for nearly 30% of the S&P 500 index. It cannot be ignored; they are also big winners this year. Nvidia and Meta were the best-performing stocks in the S&P 500 this year.

Tesla is in fifth place, and the remaining four are in the top ten. The prices of the Big Seven have never been cheap, but this year's rally has even pushed them to rare levels. Its average price-earnings ratio is 43, which is almost double the average price-earnings ratio of 25 for other companies in this field.

First, the biggest company isn't always the most expensive. Since 1990, the average price-earnings ratio of the top seven companies calculated each year has been higher than this field for about half of the time. As for the other half, the valuation gap between the top seven and the sector soared to record levels in 2020 and has since declined somewhat, although still at the peak of the 1999 internet bubble.

Well, it is reasonable to say that after excluding the Big Seven, the market will be cheaper, and this is true, even though it is not as cheap as you might think.

For a similar comparison, Caesar calculated the weighted average price-earnings ratio of the S&P 500 index for each year since 1990, including and excluding the seven stocks with the largest market capitalization.These figures confirm that when the seven major stocks were excluded, the index's current price-earnings ratio fell from 28 to 24.

However, this does not mean that treasury bonds will outperform stocks. They almost certainly won't in the long run. However, some investors prefer to hold cash until short-term interest rates or stock valuations fall, which may help explain the large flow of money market funds this year. If enough investors choose cash, watch for stock valuations to decline.

As a result, the biggest companies are expensive, and they are increasing the valuation of a wide range of market indicators, such as the S&P 500. But other companies in this space are expensive, and there's no way to blame the big seven.