By Ian Salisbury
The S&P 500 looks dangerously costly but plenty of its components are still pretty inexpensive.
The stock market keeps leaping to new heights: The S&P 500 set its 31st record high of 2025 on Friday. While that is cause to celebrate, it comes with a big note of caution. The index now trades at 22.8 times forward earnings, its highest level since the dot-com bubble of the late 1990s.
It is no secret the S&P 500's outsize returns have been driven by the runaway success of big tech names like Nvidia, Meta Platforms, and the other members of the Magnificent Seven. That means other stocks haven't risen as much.
"The bad news is the stock market has been incredibly concentrated during the current bull market," wrote longtime market analyst Jim Paulsen in a note Monday. "The good news, because of this concentration, much of the 'broader-based S&P index' still offers investors reasonable valuations."
Indeed, while the market has been surging to record highs, only a small minority of individual stocks can say the same. Fewer than one in four stocks in the MSCI World Index are within 5% of their record price, wrote Ned Davis Research strategist Tim Hayes on Thursday.
So which corners of the stock market still hold value? One way to answer the question is to look at which sector-focused exchange-traded funds are still trading at or below their 10-year averages, despite the rally.
Perhaps the cheapest is the Real Estate Select Sector SPDR ETF, which trades at 17.7 times the earnings forecast for next year, compared with its long-term average of 18.6, according to Dow Jones Market Data.
Real estate investment trusts have struggled this year, returning just 5%, in part because the Federal Reserve has left interest rates higher than investors once hoped. High rates make it harder to finance real estate transactions and make the sector's 3.3% dividend yield look less attractive relative to alternatives such as bonds.
Still, the situation may be improving, considering the Fed's recent resumption of rate cuts. And there have been pockets of growth, with senior-housing REITs like Welltower and Ventas delivering above-market returns because the members of the baby-boom generation, those born between 1946 and 1964, are now 61 years old, or older.
Other sectors that look historically cheap include consumer staples, which trades at 18.8 times forward earnings, compared with a 10-year average of 19.6 times. Energy is another example, trading at 15 times, compared with an average of 15.2 times.
Energy stocks have lagged behind the market in 2025 because OPEC has chosen to prioritize pumping extra oil over maintaining higher energy prices.
Consumer staples stocks, meanwhile, have been hit by tariff worries, although as Barron's recently noted, a number of staples stocks with classic brands can be had for prices that look attractive. They include General Mills, Clorox, and Campbell's.
Write to Ian Salisbury at ian.salisbury@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
October 06, 2025 14:53 ET (18:53 GMT)
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