US stocks have recovered significantly over the past two months from the initial plunge catalyzed by the Trump administration’s tariff policy. S&P 500 currently sits some 20% above its April low.
However, following the recent rally, the benchmark index looks “statistically expensive relative to its own history on all 20 of the valuation metrics we track,” says Savita Subramaniam – a Bank of America strategist.
S&P 500 is currently trading at about 21 times its estimated earnings for 2025, which is about 35% above its historical average – she added in her latest report.
Should investors be concerned about US stocks?
Despite stretched valuation, however, the equity and quant strategist is not particularly concerned. In fact, comparing today’s benchmark index with its historical self may even be misleading, she argued in her research note.
“This is apples-to-oranges comparison,” Subramaniam noted, adding the composition of the S&P 500 has changed rather significantly over the past few decades.
For example, asset-heavy industrial and manufacturing companies, which once dominated the said index (nearly 70% weightage in 1980), now represent less than 20% of it only.
S&P 500 today is defined by leaner, tech-driven, service-oriented companies that boast stronger balance sheets, lower debt, higher profit margins, and more predictable earnings.
In Subramaniam’s view, these structural shifts justify a higher multiple than past generations of the index might have warranted.
“The quality of earnings today is simply better,” she added, citing the lower earnings volatility and stronger free cash flow generation among U.S. firms.
Do US stocks really deserve a premium?
While some investors may balk at the current valuation, Bank of America made a strong case for the premium tied to the S&P 500 currently compared to other global markets in its research note.
According to Savita Subramaniam, US stocks offer “statistically superior” characteristics versus Asia or Europe, including double the projected long-term growth, higher free cash flow per share, and fewer non-earning companies.
She also highlighted the U.S. market’s “structural advantages,” including its energy independence, the dollar’s role as the world’s reserve currency, and “unparalleled liquidity” – all factors she’s convinced support current valuation levels.
Looking ahead, BofA’s sector preferences lean toward communication services, utilities, and technology, which align with its view that quality, growth, and defensiveness will be rewarded in a maturing cycle.
In short, while valuations may be flashing red by historical standards, the investment firm suggests the story is more nuanced, and that higher quality may warrant higher prices.
Investors should note that Wall Street shops have been raising their year-end targets on the S&P 500 index in recent weeks – the latest one being Citi which now sees the benchmark index hittingthe 6,300 level in 2025, indicating potential upside of another 8% from current levels.
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