The S&P 500 Is Still Overvalued, Say Analysts. Blame FAANG+M.

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An Apple store in Hong Kong.

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The Federal Reserve is poised to keep tightening financial conditions, but you wouldn’t know it by looking at market valuations, according to Jefferies Equity Strategy research team.

Even though the stock market is slipping in the wake of Fed Chairman Jerome Powell’s speech at Jackson Hole on Friday, suggesting that the Fed will remain aggressive in hiking interest rates, stock valuations remain relatively high. The S&P 500 , for example, was trading at a 17.3 price/earnings ratio on Monday, above its 20-year average of 15.7.

This, in turn, is preventing investors from taking a more-defensive posture, according to Jefferies.

“One of the issues that is prohibiting investors from a less-defensive posture is both the valuation of the S&P 500 and the potential for the market multiple to compress,” the analysts wrote. “Both of these factors are more constraining if the Fed is set for the ‘tighter for longer’ narrative.”

The analysts placed the blame on the tech sector—specifically, on FAANG+M, which refers to six tech giants: Meta Platforms ( META ), Apple ( AAPL ), Amazon.com ( AMZN ), Netflix ( NFLX ), Alphabet ( GOOGL ), and Microsoft ( MSFT ).

FAANG+M shares trade at a relatively high price/earnings-to-growth ratio compared with the rest of the market. Currently, they trade at a 2.13 PEG ratio, while the S&P 500 excluding those six stocks trades at a 1.39 ratio, the Jefferies team calculated.

“The investor is somewhat boxed in by a scarcity of growth on the one hand and an awkward 10-year yield on the other hand,” they added.

Write to Sabrina Escobar at sabrina.escobar@barrons.com