Bank of America defends the high valuation of US stocks: it is the “new normal”, not a bubble

The Zhitong Finance App learned that from a historical perspective, the US stock market is “extremely expensive.” However, Bank of America strategists say in-depth research will reveal that such a high valuation may be justified.

The Bank of America team, led by Savita Subramanian, said that 19 of the 20 internal indicators tracked by Bank of America showed that the S&P 500 trading price was at a statistically high level, and 4 of these indicators reached the highest level in history.

However, she believes that the intrinsic characteristics of current index constituent stocks, including lower financial leverage, lower profit volatility, higher efficiency, and more stable profit margins than in previous decades, help support expensive valuations.

This view is in stark contrast to the views of other Wall Streeters, some of whom compared the high valuation of US stocks to the turn-of-the-century internet bubble and warned that a similar situation might happen again.

Subramanian, head of Bank of America's equity and quantitative strategy department, said: “The index has changed significantly from the 80s, 90s, and early 21st century. Perhaps we should take the current price-earnings ratio as the new normal rather than expect the market to return to the same model it used to be.”

Despite the risk of US tariff policy and its potential impact on economic growth and inflation, the S&P 500 surged more than 30% from the April 8 low. The S&P 500 is rising steadily: the benchmark index has declined by less than 2% for 108 consecutive trading days, the longest since July 2024.

This week, the 12-month expected price-earnings ratio of the S&P 500 index reached a high of 22.9 times. It only broke through this level twice this century: during the bursting of the internet bubble and during the rebound of the pandemic in the summer of 2020, when the Federal Reserve lowered interest rates to close to zero.

Federal Reserve Chairman Jerome Powell pointed out in a speech on Tuesday that judging from many indicators, stock market valuations are “quite high.”

US stock valuations are at a high level

The Bank of America also pointed out that judging from data such as the ratio of stock market capitalization to US GDP, or various price-earnings ratio indicators, the S&P 500 index has never been more expensive. However, Subramanian said that this does not fully reflect the actual situation. Today's index constituent stocks are of better quality, and in the context of the Federal Reserve's interest rate cuts, they are probably more likely to succeed.

“Buying stocks at such a price-earnings ratio feels terrible,” Subramanian said. But she added that sales, profit, and GDP growth would “solve this seemingly untenable situation” because it would justify the high price-earnings ratio. Subramanian said, “Since major regions are under a relaxed fiscal policy model, and the Federal Reserve is lowering interest rates against a backdrop of continued expansion and accelerated growth in corporate profits, it is not difficult for this boom to occur.”

“We believe this' tail 'is more likely than stagflation or recession in 2026,” she said.