Stocks' price-to-earnings ratios are down as corporate profits have soared, but the S&P 500 is near its record high when prices are compared with sales
These are three of the 11 stocks among the S&P 500 that passed a screen, trading below their long-term average price/sales ratios, with estimates for very strong revenue growth through 2028.
The S&P 500's valuation, as measured by the forward price-to-earnings ratio, has declined significantly over the past year, but the index's forward price-to-sales ratio is near a 20-year high. While that may be a warning for investors, some data highlights possible opportunities among individual stocks.
Let's begin with two 20-year charts showing how these valuations have changed through Monday. First, here is how the S&P 500's SPX forward P/E has moved. This is the index's price divided by rolling 12-month consensus earnings-per-share estimates among analysts polled by FactSet. The index and associated ratios are weighted by component companies' market capitalization.
The S&P 500's forward P/E ratio has declined to 19.81 from 22.58 a year ago, even as the index has gained 18%.
The S&P 500's forward P/E has declined even though the index's price has increased 18% over the past year, because its rolling 12-month EPS estimate has increased by 35%. The S&P 500's forward P/E is now slightly below its five-year average valuation of 20.23, but a bit above its 10-year average of 19.48. The index hit its 20-year peak P/E of 24.31 in September 2020.
Now let's look at the movement of the index's forward price/sales ratio over the past 20 years:
The S&P 500's current price/sales ratio of 3.26 is close to its 20-year peak valuation of 3.35, which it reached in June.
The reason for the continued climb is that the rolling 12-month revenue estimate has increased by "only" 14%, or by less than half the increase in the EPS estimate.
Among the 11 sectors of the S&P 500, the information technology sector stands out with a large decline in its forward P/E over the past year, and because its forward price/sales ratio is high relative to its 10-year average valuation. Here's a look at the sectors' valuations, sorted by forward price/sales:
Sector or index Price/ forward sales Price/ forward sales a year ago Current P/S to 10-year average Forward P/E Forward P/E a year ago
Information technology 7.2 8.2 138% 21.5 29.4
Real estate 6.4 6.3 97% 18.6 18.1
Communication services 4.1 4.2 130% 17.9 20.6
Financials 3.4 3.5 118% 15.4 16.8
Industrials 2.8 2.7 138% 24.2 24.5
Consumer discretionary 2.8 2.8 125% 25.3 29.8
Utilities 2.6 2.8 109% 17.0 18.6
Materials 2.3 2.2 122% 18.4 21.1
Healthcare 1.7 1.4 103% 19.6 17.1
Energy 1.6 1.3 136% 13.9 15.2
Consumer staples 1.5 1.5 110% 23.0 23.0
S&P 500 3.3 3.1 133% 19.8 22.6
S&P 500 Equal Weighted 1.8 1.6 116% 16.5 17.2
Source: FactSet
Although the S&P 500 has become less expensive on a P/E basis, Mark Hulbert said the stock market as a whole is expensive. "Almost all valuation indicators with decent track records suggest that the stock market is not just overvalued - it's extremely overvalued," he wrote.
But Hulbert pointed out that the high valuation measures didn't necessarily mean a sharp market decline was imminent. "Valuation indicators are more helpful for long-term forecasting than short-term market timing," he said.
And that long-term view is shared by Ed Clissold, the chief U.S. strategist at Ned Davis Research.
In an email exchange with MarketWatch, Clissold wrote: "When profit margins are high, like they are now, the divergence between a rising price/sales ratio and a falling price/earnings ratio matters less."
What it means, he wrote, is that companies are doing a good job of converting sales into profits.
But the risk is that someone looking at a P/E ratio may not see as much downside risk as there actually is, he added, because profit margins "tend to compress sharply" during slowdowns.
"With recession risks low, I would not look at it as a front burner issue, but one to keep in the back of your mind when the next recession inevitably comes," Clissold wrote.
A related stock screen: Declining price/sales and high projected sales growth
We screened the S&P 500 for stocks trading below their 10-year average forward price/sales valuations, and then for projected revenue growth from calendar 2026 through 2028, based on consensus estimates among analysts polled by FactSet.
For the full S&P 500, revenue is expected to increase at a compound annual growth rate (CAGR) of 7.6% from 2026 through 2028, based on weighted estimates among analysts polled by FactSet.
There are 214 stocks of S&P 500 companies trading below their 10-year average forward price/sales ratios. Among those companies, there are 11 projected to increase sales at a CAGR of at least 15.2%, or double the projected CAGR for the index:
Company Projected revenue CAGR from 2026 through 2028 Forward price/ sales 10-year average forward P/S Current valuation to 10-year average Forward P/E Oracle 41.0% 4.1 5.3 77% 16.3 Nvidia 34.3% 10.2 14.1 73% 18.7 Reddit 28.3% 7.2 11.4 63% 23.6 Super Micro Computer 26.8% 0.3 0.6 52% 7.8 Amcor 24.4% 0.9 1.1 83% 11.1 Datadog 22.6% 15.8 20.2 78% 80.4 DoorDash 19.7% 4.9 6.0 82% 57.7 Meta Platforms 19.0% 5.0 7.1 70% 16.9 ServiceNow 18.6% 7.3 12.1 60% 27.3 Generac Holdings 17.1% 2.1 2.6 84% 18.4 Apollo Global Management 15.2% 3.1 8.8 35% 13.2 Source: FactSet
When asked about this stock screen in the email exchange, Clissold wrote: "Looking at forward sales brings into question whether those sales will come to fruition. Some analysts are concerned that data centers will not be built as planned due to supply constraints."
Among the stocks that passed the screen, Oracle $(ORCL)$, Nvidia (NVDA), Super Micro $(SMCI)$ and Generac $(GNRC)$ are directly involved with the data-center build-out by supplying hardware.
Heading into earnings: Nvidia is the beating heart of the AI boom and the stock market - which sets up a big test
For these stocks and others that passed the screen, the question is whether or not the companies can meet or exceed these forecasts for very strong revenue growth. This is where your own opinion comes into play.
You can begin your own research by clicking on the tickers for more information.
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-Philip van Doorn