S&P 500 | David Trainer

Biggest Valuation Disconnects in the S&P 500

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Investors Undervalue Strong Earnings

Per Figure 1, the top 40 companies, based on Core Earnings, in the S&P 500 trade at a price-to-Core Earnings (P/CE) ratio[3]’[4] of 17.4. The rest of the index trades at a P/CE ratio of 21.0. Of course, stock prices are based on future earnings so one could argue that these valuations simply reflect diminished expectations for the 40 companies with the highest Core Earnings. However, on closer inspection it becomes clear that the market is badly mispricing earnings potential among some of the largest companies.