The Case for Current Stock Valuations

As we wrap up the year, I wanted to make three quick points regarding stock valuations.

First, I believe the current stock valuation environment is not similar to the Nifty Fifty period in the 1960s and early 1970s, nor is it similar to what we experienced as in the internet bubble of the late 1990s. The second point I want to make is that PE multiples can stay higher for longer, and the third is that current multiples are high, but the backdrop warrants it.

I want to reflect back on my last video. I got some pushback because I made the point on earnings growth that four consecutive years of earnings growth was positive for stock prices. Pushback was that the S&P 500 has a high concentration of a few stocks at the top that were inflating the earnings outlook for the index. Point well taken, but I would point out that if you look at the S&P 500 equal weighted index, the earnings growth picture for that index, which weights all the companies equally, is quite robust as well. Earnings growth this year will be about 7%, a little shy of the market weighted index. But next year earnings are expected to grow 11%, and 13% in 2027. The earnings picture is robust. The earnings growth picture is robust across the broader market.

Now, let’s get back to my point on PE multiples. The current environment is not similar to the Nifty Fifty period of the 1960s and early 1970s. For those of you who are not familiar with the Nifty Fifty, it was a group of 50 stocks assembled by a firm called the Morgan Guarantee Trust back in the ’60s that consisted of a group of high-flying, very consistent growing stocks. Their thesis was that these were the only 50 stocks you needed to own, and you could own them forever because they would continue to grow.

The multiples on these stocks continued to inflate through the ’60s. I’ll give you a couple of examples. The average for the index in 1972, when the Nifty Fifty started its descent, was around 43 times earnings. The current multiple on the S&P 500 on forward earnings is about 23; a little more than half and not comparable to that inflated period of the Nifty Fifty. A stock called Polaroid, which some of you may not even know, was trading at 91 times earnings. McDonald’s traded at 86 times earnings. Disney traded at 82 times earnings and Coca-Cola at 82 times earnings.

As you can imagine, those are not the types of multiples that we’re seeing in today’s market. The thesis of the Nifty Fifty broke in the early 1970s with the onset of sky-high inflation and slowing growth. That is not the backdrop that we have today. The sky-high multiples of the Nifty Fifty with that backdrop are not comparable to what we’re experiencing today.

You may be asking, what are the multiples on some of the higher flyers today? I mentioned the Nifty Fifty names. If I look at some of the Mag Seven names, Nvidia is trading at 24 times earnings on 2026 forecasted earnings per share, according to data from FactSet. It had been over 50 times and has come down meaningfully. Meanwhile, earnings are expected to grow 63% next year, a pretty attractive multiple in a lot of respects. Microsoft is trading at 27.3 times for a very consistent double-digit earnings grower. Google is trading at 27.3. Meta at 22.1, and Amazon at 28 times. Remember when Amazon was trading over 100 times? You can see just from those couple of names I just mentioned that versus the Nifty Fifty names, there’s no comparison.

How about the internet bubble? You hear that period of time referred to often in the press as being similar to where we are today. In 1999, the NASDAQ 100 traded at 60 times forward estimates. That’s 100 stocks. In that year, there were 370; in just one year, 370 IPOs, only 14% of them had earnings. Eighty-one percent of those IPOs had sales or revenues below $100 million, representing mainly small emerging companies that really didn’t have, in many cases, a business. The most profitable companies during that period got sky-high valuations. Cisco’s PE fluctuated between 105 and 200 times earnings. Qualcomm traded 128 times earnings. Lucent traded at 90 times and Sun Micro at 85 times. Again, you can see the comparisons aren’t even close. Companies like Webvan, pets.com, eToys, and my favorite, boo.com, traded on multiples of eyeballs and clicks, not on sales and revenues.

In fact, during this period of the late ’90s, I was an equity analyst covering transportation stocks, particularly freight railroads. Some of my competitors were actually starting to add value to the railroad franchise value calculation based on the amount of right of way that the railroads owned. The right of way is the land that the rail actually sits on and to both sides of it, those easements are owned by the railroads. The thesis was that the land is property under which fiber optic cable can be buried to transport all this new internet traffic, so analysts were adding that value to the railroad valuation. Now that’s a bubble. Yours truly certainly would not have participated in that type of valuation exercise, but from what I understand, others did. Nonetheless, there are really no similarities between that 1999 period, nor the Nifty Fifty period in the 60s.

The second point on valuations that I want to make is that valuations can actually stay high for long periods of time. This point is based on the fact that information is everywhere and information is what we’re using to get comfortable in owning stocks. If you think about the essence of information flow around corporate events and corporate earnings, it’s constant and consistent. There are quarterly earnings conference calls and transcripts. Companies are forecasting their earnings and giving guidance. There’s information from various sources on the internet, which can be absorbed and used in a calculation and a forecast of the future. All of that information coming from the companies and outside sources can be used to get comfortable with the progression of earnings and the progression of where the future of the business is heading.

When you compare that to information that analysts and market forecasters used to get, it’s night and day. When you think about the 1990s and prior to that, we were happy when the fax machine was invented so that we could get real-time information off of a fax machine. Prior to that, we were getting information in the mail. There was an old S&P book sent out monthly to update analysts on the S&P 500 and sub-sector and industry earnings, sales and dividends. Every year we got an annual book from the S&P and we would race to update all of our models when it arrived in the physical mail.

We’ve come an awfully long way. My point is that information flow, access to information, the guidance from companies, and the visibility we have on the future of the business all contribute to a comfort level allowing investors to pay a higher multiple on earnings and higher PE multiples.

Thirdly, and finally, the current environment is conducive to high multiples. When you tick off the list, earnings growth is accelerating, profit margins are expanding, and free cash flow growth is accelerating. That’s not a story you hear in the market much these days. In fact, what you’re hearing is that all of these big CapEx spenders are depleting their free cash flow. That story isn’t necessarily accurate when you look at the free cash flow forecast for the S&P 500. On average, free cash flow growth has been about 7.3% over the last 15 years. It will be a little lower this year for 2025 at 3.6% free cash flow growth, but next year that number is accelerating to 19%, with another 19% free cash flow growth in 2027. The free cash flow story is not being focused on in the market, but it’s an important one to tell.

Interest rates are likely moving lower. We saw the Fed move last week. Inflation is hovering around its long-term average. Companies are innovating and driving new product and business cycles. These are all contributing to an environment that fosters higher stock multiples. The message is yes, PE multiples today are high versus most historical averages, but for good reasons, and multiples can stay high for a long time.

There are plenty of risks to focus on in the market, but we don’t believe that high multiples are near the top of that list. Have questions? Email me at terry.gardner@apollonwealth.com.

C.J. Lawrence a division of Apollon Wealth Management, LLC (“CJL”) provides advice and makes recommendations based on the specific needs and circumstances of each client. For clients with managed accounts, CJL has discretionary authority over investment decisions. Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart, graph, or marketing piece to make decisions. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. All indices represented are unmanaged, do not consider the effect of transaction costs or fees, do not represent an actual account and cannot be invested in directly. The information contained herein is intended for informational purposes only, is not a recommendation to buy or sell any security and should not be considered investment advice. Please contact your financial advisor with questions about your specific needs and circumstances. Please visit our website for other important disclosures.