S&P 500 Breaks 5,100: Nvidia, Eli Lilly Overvalued?

Key Takeaway

• S&P 500 and Dow Jones hit record highs in 2024, with the S&P surpassing 5,100 and stocks like Nvidia and Eli Lilly appearing overvalued.
• Nvidia's stock surged ~59% this year but shows a high trailing P/E of 65.5 and forward P/E of 35.2, indicating overvaluation.
• Eli Lilly's trailing P/E ratio stands at an expensive 130.5 with a forward P/E of 69.5, suggesting potential for profit-taking.

Navigating the Bull Market: A Closer Look at Valuations and Opportunities

As the S&P 500 surpasses the 5,100 threshold, marking a significant milestone with a more than 6% gain this year, and the Dow Jones Industrial Average also reaching new heights, the buzz around Wall Street is palpable. However, this exuberance brings with it a shadow of concern regarding the valuation of certain stocks within the US equities market. The rally, while broad, has notably pushed several stocks into what some market analysts consider overvalued territory, according to a CNBC Pro Stock Screener analysis. This analysis highlights stocks with a trailing 12-month price-earnings ratio above their 5-year average and a forward P/E above the S&P 500's average of 16.6, which have also outperformed the market by more than 15% year to date.

The Valuation Conundrum

Among the stocks catching the eye of investors for their stellar performance yet eyebrow-raising valuations are Nvidia and Eli Lilly. Nvidia, a titan in the artificial intelligence space, has seen its stock price surge by approximately 59% this year, buoyed by a strong earnings report. Despite this impressive growth, its trailing 12-month P/E ratio of 65.5 and a forward P/E of 35.2 raise questions about sustainability and value. Similarly, Eli Lilly, propelled by its new weight loss drug Zepbound, has shown remarkable quarterly results. However, its trailing P/E of 130.5 and forward P/E of 69.5 suggest a valuation that may give pause to some investors. Other notable mentions include Merck and Advanced Micro Devices, which also appear potentially overvalued in the current market environment.

A Quiet Day on Wall Street

Despite these valuation concerns, the overall market mood remains cautiously optimistic. On February 27, 2024, U.S. stocks held near their record levels after a relatively quiet day of trading. The S&P 500 edged up by 0.2% to 5,078.18, flirting with its all-time high set the previous week. Meanwhile, the Dow Jones Industrial Average experienced a slight dip of 0.2%, and the Nasdaq composite rose by 0.4%. This stability comes amidst a backdrop of solid earnings reports and the hope that a robust economy will continue to support profit growth throughout the year.

The Bull Market's Bargains

In the midst of this bull market, investors are on the hunt for bargains, seeking out stocks that, despite the market's overall high valuations, present a buying opportunity due to their long-term growth prospects. Amazon and Chewy stand out as two such opportunities. Amazon, with an 80% climb last year and an additional 15% gain this year, trades at 41x forward earnings estimates. Its leadership in cloud computing and e-commerce, coupled with recent cost-efficiency measures, positions it for sustained growth. Chewy, on the other hand, despite consistently positive performance, has not seen its stock price take off. Trading at only 23x forward earnings estimates, Chewy's focus on the resilient pet supplies market and its strong customer loyalty program make it an attractive buy.

Looking Ahead

As the market navigates through these record highs, the discerning investor will do well to keep a close eye on valuation metrics, seeking out those opportunities that combine growth potential with reasonable pricing. While concerns about overvaluation in certain sectors and stocks are valid, the broader market's stability and the presence of undervalued growth stocks suggest a landscape ripe with opportunity. As always, a balanced approach, focusing on both short-term market dynamics and long-term fundamentals, will be key to navigating the current bull market successfully.