US equities are expensive, and the “Magnificent 7” even more so.

Those observations are hopelessly trite. I know.

But one thing I’ve learned over — checks watch — seven years now writing for public consumption, is that weekends are where complex analysis goes to die. It’s not that readers aren’t willing to engage on weekends, it’s just that they don’t want to think too hard, which I suppose is understandable.

Personally, I can’t turn it off. The thinking, I mean. It never stops. Paradoxically, the urge to learn and write only intensified with each year removed from any and all professional obligations. It makes me physically uncomfortable to tune out. If there’s a void, I’ll fill it. Let’s fill a Saturday evening void, shall we?

The S&P is coming off its first weekly decline in six. As discussed in the latest weekly+, the small dip came courtesy of hawkish posturing from central banks, who aren’t done raising rates. What, exactly, would you be buying if you bought the 1.4% “dip”?

Well, you’d be buying the index at a forward multiple that ranks in the 88%ile looking back nearly half a century, and you’d also be buying a market that’s valued at 232% of US GDP, which ranks in the 97%ile.

Indeed, as the table from Goldman makes abundantly clear, you’d be buying a market that’s expensive on pretty much every single important metric, and the situation doesn’t look much better if you measure using the median stock instead of the index. (The metrics shown above were calculated on June 15, but they’re basically all the same today.)

Would that be a bad idea? Maybe! Maybe not. But maybe! “Historically, when the index has traded at this level or above, the S&P 500 has experienced a median drawdown of 14% over the next 12 months as compared with a 5% drawdown over a typical 12-month period,” Goldman analysts including David Kostin wrote, adding that “valuations are still high after adjusting for the level of interest rates, though slightly less so.”

How much of that’s down to the “Magnificent 7”? Or, put differently, let’s say you want to buy the seven stocks that count, and not the 493 that don’t. How expensive are they? The good news is, they’re cheap compared to where they traded collectively during the pandemic bubble, as shown below.

The bad news is, they’re very expensive compared to the median and nearly twice as expensive as the rest of the market.

Does that make them dangerous? Yes and no.

Yes, in the sense that, as Kostin went on to point out, “stocks with higher valuations might be vulnerable to underperformance on a relative basis should the Fed continue hiking beyond the July meeting” and lofty growth expectations for the group (18% CAGR through 2025) could fail to pan out, leading to “material underperform.”

But no in the context of humanity’s long history of risk-taking and, as I mentioned in the same weekly linked above, not even in the context of very recent market history. Remember, it wasn’t so long ago when otherwise sane people were clamoring to outbid each other for pieces of “land” in a virtual world that wasn’t even built yet on the totally rational premise that if a drawing of a cartoon monkey was worth half a million, then surely “deeds” to imaginary property marketed by the people who drew the monkeys must be a good investment too. “Fortune and glory, kid. Fortune and glory.”