This Top Investment Manager Proves The S&P 500 Is 20% Overvalued (2024)

Getting nervous about the S&P 500's nearly 9% jump this year? You should be, says a top money manager.

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The S&P 500 is now 20% overvalued based on calculations comparing the stock market with the bond market, says Jack Ablin, chief investment officer at Cresset Capital Management. That's a scary pronouncement as it means a 20% crash is needed just to make the S&P 500 fairly priced.

"The S&P, on a capitalization-weighted perspective, is expensive," Ablin said.

Why The S&P 500 Is Expensive

Ablin uses a clever set of calculations to gauge the S&P 500's valuation. And the results all point to investors paying up way too much for the S&P 500.

Specifically, he compares the yield on BBB-rated corporate bonds against the S&P 500's forward earnings yield. The result is concerning.

The earnings yield on the S&P 500 is currently 4.8% based on expected 2024 profit. That's considerably less lucrative than the 5.9% yield on 10-year BBB corporate bonds. For the S&P 500's earnings yield to be equally compelling compared with BBB corporate bonds, the S&P 500 would need to tumble 20%, Ablin says.

Ouch.

What's The Bright Side?

Luckily, though, Ablin isn't telling investors to dump all their S&P 500 stocks. Much of the overvaluation is due to wild premiums paid on a "handful of high-quality megacap technology companies," Ablin said, alluding to Nvidia (NVDA), Microsoft (MSFT), Apple (AAPL), Amazon.com (AMZN) and Meta Platforms (META).

He says most other S&P 500 stocks have risen in line with their earnings and dividends since 2010. Their valuations are still reasonable.

Additionally, valuation alone is rarely a reason to sell the S&P 500. Expensive stocks can get yet more expensive. "Valuation is not a timing tool," Ablin said. "Valuation is only one metric in a mosaic that we continuously track to gauge the market, which also includes the economic backdrop, liquidity, psychology and momentum."

Priciest S&P 500 Stocks

Those with the highest forward P-E ratios

Sources: S&P Global Market Intelligence, IBD