What’s driving S&P 500 valuations now?

In 2025, equity markets have been shaped by government actions, policy shifts, and macroeconomic data. Additionally, the technology sector has dominated headlines, with investors closely watching single name securities. However, despite the intense focus on tech, the gap between the best and worst performing sectors in the S&P 500 year-to-date remains historically narrow. Information Technology leads Consumer Staples by 25%, which may sound substantial, but this level of sector dispersion is the lowest in 35 years, excluding 2018. All sectors have put up positive returns YTD and there are 5 sectors (in addition to tech) delivering double digit returns.

Weekly highlights

Addressing concerns around US equities

Institutional clients hold concerns around US equity market concentration, valuations, and resiliency. Some of the headlines surrounding these concerns include:

• The top 10 holdings in the S&P 500 make up about 40% of the index (NVIDIA alone makes up 8% of the S&P 500)
• The Information Technology sector accounts for 35% of the index
• S&P 500 forward price-to-earnings ratio is approaching levels seen prior to 2000

Observing the effective number of securities in the S&P 500 reveals that there are about 44 names within the index that are truly driving returns, the lowest level observed over the past ~35 years.

This evolution has encouraged many clients to evaluate diversification within their strategic asset allocation. Indeed, we believe diversification will be important heading into 2026 as single names command larger weights within the index. However, we would caution from completely diversifying away exposure to the US market, as heavyweights have been large contributors to both performance and earnings growth. Not to mention, the index provides solid exposure to the AI theme.

Concentration has also prompted clients to probe further into what’s driving valuation higher, and brought about questions regarding the resiliency of the S&P 500 index.

Overall, broad index level valuations are extended relative to recent history, and the same can be said about the technology sector. However, we don’t believe this experience is similar to another technology “bubble”.

Firstly, valuations during the technology bubble were much more extended. At its peak in early 2000, the Information Technology sector of the S&P 500 was trading at 50x NTM P/E., which is a 69% premium to valuations of tech today.

Within the S&P 500 itself, some of the large players are trading at elevated multiples but, the breadth of richness is not spread among the S&P 500 like it was in March of 2000. Besides a few outliers, the majority of the top 50 names by market cap are trading below 50x earnings, unlike in 2000.
 

Market fundamentals today stand in stark contrast to the early 2000s. Back then, technology valuations soared without corresponding improvements in profitability. The chart below illustrates this disconnect, showing ROE and EBIT margins stagnating or even declining as valuations surged. The current valuation trends are supported by stronger fundamentals, making today’s environment far more resilient and less speculative than the dot-com era.

In addition to healthier margins and profitability, we would be remiss not to mention the earnings growth and free cash flow generation the largest firms are producing. Within the S&P 500, the top 10% of securities (measured by weight in the index) generate 60% of net income for the overall index. Within the information technology sector this is even more pronounced. The top 10% of names in the sector account for 75% of net income.

As investors navigate concerns about market concentration and valuation, it’s important to recognize the resilience and breadth of today’s US equity market. Unlike prior cycles, fundamentals remain strong across both technology and the broader S&P 500. This strength is underpinned by supportive macroeconomic conditions, fiscal policy, and healthier corporate balance sheets—characterized by higher cash reserves and lower leverage. Together, these factors create a constructive outlook for US equities as we move toward 2026