INSIGHTS

On April 20, 2026

AAM Viewpoints — Being Deliberate vs. Conventional Wisdom

I have been hearing a great deal about multiples being stretched. And given one of the strongest three-year return periods for the S&P 500 dating back to the 1920s (90^th percentile), I thought it would be a good time to investigate. Were those strong returns reflective of better earnings, or due to multiple expansion? Do we have stretched multiples?

And as usual, the answer is: wait for it, it depends. I know, not very satisfying. But when you dive deeper, you can find some interesting insights. In fact, the story is not what you think. Multiples are higher than they were three years ago. They have expanded by over 10%, which now places current multiples in the top quintile of history. So, yes, multiples are stretched.

Source: Factset | P/E = price-to-earnings ratio

But the next question I asked was where are they stretched? And this is where things get very interesting. The conventional wisdom narrative has been, technology is overvalued relative to the market or the magnificent seven is overvalued relative to the market. Well, let’s research these propositions.

Conventional Wisdom #1: Technology is overvalued relative to the market

Sector Valuations: Today vs 3 Years Ago

Source: Factset | data from 3/31/26 compared to 12/31/22

This chart shows by what percentage Price-to-Earnings ratios (multiples) have expanded for each sector in the S&P 500 over the last three years, as well as for the overall S&P 500 (orange bar). While there are several sectors having significant increases in multiples like Energy, Industrials, Telecomm, and Financials – Technology (green bar) is not among them. In fact, Technology is the only sector where multiples have contracted over this time-period.

How could this be? Haven’t technology returns been driving market returns. Well yes, but technology has also been the key driver of the very strong earnings we have had over the last three years. The S&P 500 earnings have risen by over 40% between Q4 2022 and Q4 2025. This is an annualized earnings growth rate of 12%, which is almost 2x the 7% long-term average annual earnings growth rate of the S&P 500.

Answer: Not necessarily. Technology’s P/E Ratio has fallen in the last three years, the only sector to do so.

Conventional Wisdom #2: The Magnificent Seven is overvalued

Trailing 12 Month and Forward 12 Month P/E Ratios

Source: Factset | Data from 3/31/26

These charts display the trailing (top image) and forward (bottom image) P/E ratios for each of the Magnificent Seven companies and for the S&P 500 (orange bar). One caveat to keep in mind is that growth stocks, like the Magnificent Seven, tend to trade at higher P/E ratios due to their potential future earnings power.

Just like with the first Conventional Wisdom, we are not so sure about this one either. If we take out the outlying highest valuation stock (guess this is what happens when your earnings fall by over 60% in the last three years), the rest of the Magnificent Seven companies P/E Ratios are much closer to the S&P 500 P/E Ratio. Looking at trailing 12-month P/E ratios, you can make the case that the Magnificent Seven stocks have higher valuations, but this could generally be expected of higher growth stocks, as mentioned above.

When looking at forward 12-month P/E ratios in the right-hand exhibit, this growth bias is adjusted a little. Here you see all but two of the stocks are within 3 points of the S&P 500’s P/E ratio. This could be expected given their growth profile.

Answer: Probably not, but you could make the case for it, especially based on earnings over the past 12 months.

Implications

What does this all teach us? In this market, it is important to be deliberate — one of our current three Ds to investing. Things are not always as you think and there can be investment potential in parts of the market not considered by Conventional Wisdom. In fact, I have always thought Conventional Wisdom as just that, Conventional, not always sure about the Wisdom part. Wisdom generally comes from digging deeper into topics and deliberately deploying these insights across your investments.