S&P 500 premium is mostly warranted says BofA

Investing.com -- Bank of America analysts argued in a note Friday that the S&P 500’s valuation premium is “mostly warranted,” despite the index appearing expensive by traditional measures.

“The S&P 500 now trades at 21x forward earnings, 35% above average,” BofA wrote, adding that it “looks statistically expensive relative to its own history on all 20 of the valuation metrics we track.”

However, the analysts say comparisons to historical averages may be misleading. 

“Today’s S&P is apples vs. prior decades’ oranges,” they said, noting a shift in sector composition.

“Nearly 70% of the index was asset-intensive Manufacturing sectors in 1980 vs. <20% today.” 

They argue the index “has become higher quality, with lower leverage, lower earnings volatility, and higher margins.”

BofA also defended the U.S. market’s premium over global peers. “The US trades as the most expensive region (~40% premium vs. Europe/Asia which trade at 16x),” they noted, but emphasized that “quality, balance sheets, growth potential and risk are statistically superior.” 

They pointed to the U.S. being “half as levered as other regions” and praised “significantly lower estimate dispersion on 2025/2026 forecasts.”

Additionally, the U.S. offers “roughly double the long-term growth potential of Asia and Europe, with lower earnings volatility than Europe, plus higher free cash flow per share and a lower percentage of non-earners vs. both Asia and Europe,” says the bank.

BofA also cited structural advantages including “labor fungibility, USD as reserve currency, energy independence, unparalleled liquidity and Tech primacy (at least for now).”

For near-term positioning, BofA’s tactical model prefers U.S. “Communication Services, Utilities and Tech,” and highlights “Interactive Media & Services, Metals & Mining and Independent Power & Renewable Electricity Producers” as top industry opportunities.