Investors face an interesting paradox these days: The world’s most widely followed stock market index, the S&P 500, appears expensive, no matter how you gauge such things; however, most individual stocks in the index look to be reasonably priced.
The biggest 10 stocks typically account for between 15 and 25 per cent of the S&P 500′s value. These days, though, they make up 30 per cent, the highest level in a quarter-century. They now trade for more than 29 times their forward, or expected, earnings. This is nosebleed territory, far above historical norms. The lofty valuations suggest investors may be suffering from an outbreak of irrational exuberance.
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