US stocks. You gotta have ’em. Unless you want to underperform. And nobody wants that.

The problem is they’re rich. Absurdly so on many (most) absolute metrics and measures.

Of course, US shares deserve to trade rich. Just maybe not as rich as they currently trade. “Fact is at the foundation of nearly every asset bubble; there is an irrefutable truth that makes critics and doubters look foolish,” JonesTrading’s Mike O’Rourke wrote, in his latest. “The foundational truth about the incredible quality of the largest companies has given them bubble valuations,” he went on, noting that the vaunted “Magnificent 7” trade significantly expensive to the so-called “S&P 493.”

It’s thanks in no small part to the mega-caps that the cap-weighted benchmark trades so rich relative to its own history. And yet, you could argue, if you had to, that the fundamentals — the “foundational truths” O’Rourke mentioned — actually do justify valuations for the best and biggest. If you “control for earnings growth and other fundamental attributes such as balance sheet strength and profit margins,” the Mag7 are fairly valued, Goldman’s David Kostin suggested, pointing to the scatter plot on the right, below.

Indeed, the “typical” S&P 500 stock is fairly valued too, according to Kostin’s methodology. Note from the figure on the left that Mag7 valuations are “not extreme,” as he put it, or at least not if you define “extreme” by reference to 2021’s “everything bubble.”

If you’re wondering, Goldman’s model for FY2 multiples utilizes “a cross-sectional regression” of valuations on “margins, turnover, leverage, earnings stability, market cap, near-term growth expectations, and equity duration.”

Between the quality of the market leadership and the consensus view that even if the leadership falters, the macro and policy environment should be generally supportive for the rest of the index, Wall Street’s pretty confident in the notion that meaningful valuation compression’s unlikely in 2025. Even the bears are reluctant to forecast a lower multiple.

“Our work shows that in 12-month rate of change terms, it’s very rare to see meaningful multiple compression in periods of above average EPS growth (our base case) and a declining policy rate on a year-over-year basis (our economists’ base case view),” Morgan Stanley’s Mike Wilson wrote Monday.

The table on the left, above from Wilson, makes the point. The figure on the right is just another way to visualize the valuation premium for the cap-weighted multiple.

Wilson continued. “The median stock multiple trades at a ~3 turn discount to the cap-weighted multiple and should see upside if the earnings growth recovery broadens in 2025 as expected,” he said.

The overarching message from the above is that there are any number of avenues down which one can drive to goal-seek an unchanged (which is to say a perpetually rich) index multiple.

Wilson added a caveat. “[W]e’re balancing these factors with the notion that the level of valuation is extended relative to history, a phenomenon we’re also respectful of,” he said, adding that “we think our 12-month forward P/E target of 21.5x (vs. 22.0x today) reflects the balance of these factors and is a reasonable assessment of fair value in an environment of broadening EPS growth and subdued interest rates in the base case.”

I think it’s fair to suggest that if Wilson weren’t subject to the sort of pressure that goes along with being chief US equity strategist at a Big 5 sell-side firm, his take would sound a little less like Kostin’s and a lot more like O’Rourke’s.