Is it worth me buying S&P 500 stocks with the index close to record highs?
Back in early April, the S&P 500 tumbled over 10% in just over a week. Tariff concerns and the impact they might have on global companies caused investors to run for cover. Yet since then, cool heads have prevailed, with the index recovering all of the losses and now less than 200 points away from record highs. Given the lofty valuation, I’m trying to decide whether it makes sense to buy or not.
Lack of value in being passive
One option would be to buy an index tracker. Yet I think this passive approach isn’t the smart choice. At an index level, the price-to-earnings (P/E) ratio is 28.80. I use a benchmark figure of 10 to assign a fair value here. Of course, you can argue that the US is home to more growth stocks, which can trade at higher P/E multiples. Yet even with this, the fact that the index average is close to 30 doesn’t excite me to buy.
Further, I’m not sure that investing with the S&P 500 above 6,000 points offers me a lot of potential gain, given the current geopolitical uncertainty. If things seriously escalate in the Middle East, or in Eastern Europe, I think the stock market could come under pressure. Were it already trading at low levels then I’d argue the impact could be small. But when the index is this high, it risks having a larger (and swifter) move lower.
Active picks can still yield results
Instead, I’d prefer to consider buying specific US stocks that I believe can still rally despite the index’s high level. For example, Global Payments (NYSE:GPN) is a leading fintech company that processes electronic payments for merchants and financial institutions globally.
Over the past year, the stock is down 18%. This puts the P/E ratio at just 10.78. From an evaluation perspective, this already looks a lot more appealing. There are also clear catalysts for it to do well over the coming year. Digital payments are expected to grow rapidly, driven by e-commerce. It’s clearly pushing for scale, with it announcing in April it will be buying rival Worldpay for more than $22bn.
The numbers from the combined business are huge, enabling about 94bn transactions and $3.7trn in payment volumes across more than 175 countries.
The share price has fallen over the past year, which might concern some. One of the main reasons for this drop was that the Worldpay purchase will partly be funded by debt and the high potential costs of integrating it. This is a risk, but I think the market has overreacted.
I’m thinking about adding the stock to my portfolio for exposure to the US, but at a more attractive valuation than simply buying the index tracker.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
