Nasdaq Has Been Rising Faster, But It’s Also More Expensive

The Nasdaq Composite has logged bigger gains than other major indexes recently, but it’s also more stretched by traditional valuation measures.

The Nasdaq, which rose 28% last year and closed above 7000 for the first time ever on Tuesday, traded at 27.55 times the last 12 months of earnings on Friday, according to Thomson Reuters data. That’s well above the S&P 500′s level of 18.27 times earnings after its 19% gain last year, FactSet data show.

The Nasdaq contains more technology companies and younger firms that aren’t yet as profitable, so it’s not that surprising that it’s more highly valued by that measure. The S&P 500 typically requires companies to post four straight quarters of profitability before being added to the index.

The last time the Nasdaq was cheaper than the S&P 500 by this measure was during a brief stretch in 2013.

Last June, as the index was surging, its price-to-earnings ratio was at the highest relative to the S&P 500 since 2010.

On a forward-looking basis, the result is similar. The Nasdaq traded at 22.47 times earnings expected by analysts over the next 12 months on Friday while the S&P 500 traded at 18.27, according to FactSet.

Of course, both indexes heavily weight some of the internet and e-commerce giants whose P/E ratios are higher than the broader market. Amazon.com traded at 301.7 times the last 12 months of earnings on Tuesday afternoon, while Facebook was at 35.5 and Google parent Alphabet was at 35.89.

Neither index trades at nearly the P/E that it did during the height of the tech bubble, when companies with little revenue or profits had huge share price spikes. In March 2000, for example, the Nasdaq’s P/E topped out at 72.2.