Is the S&P 500 Growing Too Fast? | June 2026 Market Update

Full transcript:

Hello and welcome to this month’s Market Update for June 2026. My name is Steve Latham and I am the Chief Investment Officer for Bernicke Wealth Management. Today we’re going to be talking about the anatomy of the growth market. And what do I mean by that? Well, the United States and the S&P 500, but the overall economy has been driven largely by artificial intelligence investments.

A lot of these investments are from hyperscalers or growth companies. Think of Amazon. Think of Google. You can think of some of the other smaller names like Anthropic, OpenAI. Even though they are private, they are plowing tons of money into artificial intelligence. Nvidia’s obviously one of the largest ones as well. And what I want to do is show you how the overall valuation of the S&P 500 has reacted to these growth companies, and why the valuation of the S&P 500 may not be as elevated as what history would suggest.

Current S&P 500 Valuation

So the chart here in front of us shows the current valuation of the S&P 500. And right now, as of the end of May, we have a valuation of roughly 21 times forward earnings. What does that mean? Well, the market estimates what all 500 companies in the S&P 500 are going to earn over the next 12 months and then puts a multiple on that.

So if they’re going to earn $300 per share in aggregate and the multiple is ten, then the value of the S&P should be 3000. Of course, if it’s 20 then it’s 6000. Right now it’s a little bit higher than that. And the earnings per share is of course higher than that. So that’s why we’re up in the 7370-7400 range for the S&P.

Now because we show this going back to the mid 90s, we see that over this 30 year average this 21 multiple is quite a bit higher than average. In fact the 30 year average right now is 17.2. So someone look at that and say well the S&P 500 is overvalued. I don’t want to buy into it, but we need to dive deeper into what those valuations are looking at and why the market could be justified at this level.

Where Is the Growth Coming From?

So first we want to look at growth. Where is the growth coming from, what sectors are driving this growth. And why should a 21 times forward multiple be comfortable for the S&P. Well what you see here is based off of the first quarter’s earnings, the overall earnings estimates based off of sector and how much they’re expected to grow year over year.

And right now the bars that you see in the green are some of the highest growing sectors in the S&P 500. And of course that growth is coming from companies like Tech, Communication Services, which includes companies like Google, and then Consumer Discretionary, which includes companies like Amazon and Tesla. All of these companies are in the top ten of the S&P 500, which currently stands at a little over 45% of the overall weight in the index.

And so when you look at it from that perspective, you can say, okay, well, we see significant growth in the largest companies which represent the most weight in the S&P 500. I would expect the valuation of the overall index, therefore, to be higher on average than if it were dominated by value companies like financials, utilities, consumer staples and so on.

And we can see even over on the far right hand side of this chart, we have a handful of sectors that are either negative growth like healthcare or energy, which is barely scraping above zero.

How the S&P 500’s Composition Has Changed

So then we want to look at the competition or composition, excuse me, of the S&P 500. And this is a really interesting chart put together by JP Morgan in their monthly guide to the markets.

And what this shows you are the top ten companies over the last five decades, excuse me, six decades going all the way back to the 1980s. And what you can see all the way over here on the left hand side. Back in 1985, the largest companies in the S&P 500 were companies like DuPont, Royal Dutch, Amoco, Shell, three energy companies right there.

You had the conglomerate AT&T, General Motors, GE, Exxon, IBM. These companies, with the exception of IBM and perhaps GE, were not tech companies. They were value oriented. So you would expect the valuations of those companies to be a lot lower because they’re more dividend payers. They’re not robust growers. And you can see the evolution throughout the years. The colors represent companies that were in the top ten in prior years.

And as you go through 95, oh five, 15, 25 and now current, we can see that none of those companies that were in the top 10 in 1985 represent the top ten today. What we do see in the current top ten are companies like Nvidia, Apple, Google, Microsoft, Amazon, Broadcom, Meta, Tesla, Micron, and Eli Lilly, the only company that is not somewhat associated with technology.

So those are growth companies. They’re dominated by overall growth. Yes, they do pay a dividend to some extent, but that’s not the reason why you buy them. You buy them because they are growth engines and therefore they should be valued like a growth engine.

Valuation Dispersion and What It Means

So when we go back to the original valuation for the S&P 500, we can see some of these spikes in overall valuations.

As those top ten companies changed over time. In 2025 we had high valuations. In 2015 our valuations were about average, but they were coming off of the great financial crisis in oh eight. But going back to the mid 90s and going into the 2000, you also had high valuations when you started to see some other technology sectors come into play there.

And finally, the last piece that we want to look at here is the overall valuation and the volatility associated with those valuations, especially whenever you look at how those companies are dominating those sectors or dominating the overall index. So if we look at again today, the green line represents the average price to earnings ratio of the S&P 500.

The gray bars on either side represent the overall spread or the valuation dispersion within the S&P 500. So the broader the dispersion, the more growth you have on the upside versus the value on the downside. Said differently, if you have a tighter dispersion, that means your index is more dominated by value companies as opposed to growth companies which tend to be more volatile.

And as you can see, going again all the way back to the great financial crisis, that valuation dispersion widened and widened and widened until we got to the point where we’re at today, where you have a very wide valuation spread. We can see that relative to the 25 year average at 11.8, it’s currently just shy of 17. So when we’re looking at that, this all points back to yes.

The overall S&P has a high valuation, but it has a high valuation because we have growth companies dominating the overall index. And that doesn’t necessarily mean it’s justified in any way. But what it does mean is that the historical context valuation can provide us might not be as meaningful, because we’re comparing apples to oranges. We don’t want to compare a value oriented index to the performance of a growth oriented index, which is where we’re at today.

Looking Forward: A Better Valuation Framework

So going forward when we’re looking at valuations, we want to look at it relative to more recent history. Are we overvalued compared to how we were valuing things in 2022 or 2018 or 2015? That’s a little bit more relevant than valuing something from the middle of the aughts, or even going back to the 90s and 80s.

So again, going forward, when we’re looking at valuations of artificial intelligence companies, data center or hardware companies, we want to look at that and say, well, how is that relative to the overall index and what is the index comprised of to give us an appropriate valuation measure?

So that’s all we have for today. If you have any questions on overall market valuations and how reviewing the market’s going forward, please don’t hesitate to reach out. We’re always happy to answer your questions for you. Thank you very much.