I hold some fairly forthright views on the US stock market, as it stands. The S&P 500 index seems overvalued, being in the top 1% or 2% of historic valuation measures. The last time I worried this much about a stock-market crash was during the dotcom bubble that burst in 2000. Then again, not all US shares are wildly overvalued and I see some — notably Alphabet (NASDAQ: GOOG) stock — as under-priced.
S&P: sexy & pricey
Currently, the S&P 500 trades on 25.3 times trailing earnings, producing an earnings yield below 4%. Also, its dividend yield has dropped to under 1.2% a year (but US corporates have rarely been big on paying out hefty dividends).
Likewise, the tech-laden Nasdaq Composite index is even more highly valued. It trades on 32.7 times historic earnings, delivering an earnings yield below 3.1%. Its dividend yield is a mere 0.6% a year, largely because big tech firms prefer to reinvest their profits to boost future growth.
No-one could convince me that these indexes offer deep value at current price levels. However, I’m not brave enough to sell my family portfolio’s hefty exposure to US stocks quite yet. That’s because history has taught me that markets can hit many fresh highs before financial gravity finally drags them down.
Then again, though the US stock market looks priced close to perfection, I can see pockets of value — and hidden gems — lurking among American large-cap shares.
Silicon value
One US mega-cap stock I’ve kept a close eye on is Alphabet. Shares in the owner of Google search, YouTube video-streaming, Waymo self-driving cars and DeepMind AI plunged earlier this year. The Alphabet share price bottomed out at $142.66 on 7 April, after President Trump unveiled hefty tariffs on US imports.
After this price crash, I repeatedly argued that this Magnificent Seven stock was far too cheap and offered powerful potential. However, financial constraints meant that I failed to buy more stock back then, which I’m kicking myself about now. Happily, my family portfolio owns a slug of Alphabet stock bought on 4 November 2022, just as the share price hit its 2022 low.
Last Friday (19 September), Alphabet shares hit a record high of $256.70, up 79.9% from their April slump. As I write, they trade at $250.46, valuing this global Goliath at just over $3trn. After this price surge, they trade on 27 times trailing earnings and offer a cash yield of 0.3% a year.
If Alphabet were a UK share, I’d probably see these fundamentals as expensive. However, as a US tech Titan, Alphabet has produced the sort of go-go growth that most big British companies would envy. And like my investing hero Warren Buffett warns, “Never bet against America”.
Lastly, I’m fairly sure that previous fears and doubts surrounding US anti-trust lawsuits against Google were largely misplaced. The biggest case resulted in an unexpectedly generous ruling that did not insist on a break-up of the business. Therefore, I see Alphabet stock as fairly priced to under-priced. We have no intention of selling our holding at these price levels.
