UBS acknowledges that the U.S. stock market valuations are high but not excessively so, supported by four key factors: rising valuations during non-recession periods, the increased presence of tech companies, improved cash flows, and lower current capital costs.
The S&P 500's price-to-earnings (P/E) ratio stands at 22.2, above the 30-year average of 16.8. Despite concerns, UBS suggests these high valuations are justified. The tech sector now represents 40% of the S&P 500, up from 10% three decades ago, contributing to overall valuation increases.
Improved cash flows and reduced capital intensity have enhanced companies' abilities to return funds to shareholders. With capital costs lower than historical averages, the S&P 500's P/E ratio could rise further by 2025.
