Barclays: U.S. stocks are not cheap, but tech stocks are not expensive.
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Although U.S. stocks are not cheap, they do not appear to be overvalued, especially technology stocks.
According to Chase the Wind Trading Desk, Barclays Bank pointed out in its latest research report that although the S&P 500's overall valuation has reached 22-22.5 times price-to-earnings ratio, it is not excessively frothy, especially with technology stocks being relatively reasonably valued and still having room to rise.
Specifically, the U.S. stock market had a strong Q2 earnings season: S&P 500 earnings per share grew by 10.6%, sales grew by 6.1%. However, growth is still highly concentrated in a few sectors, mainly large technology stocks and financials, while other sectors performed weakly. At the same time, Wall Street has raised its full-year 2025 EPS forecast for the S&P 500 from $264 to $268, but expectations for the second half of the year have begun to factor in the negative impact of tariffs.
More notably, valuations for technology stocks, the main growth engine of the market, are relatively reasonable. Large technology stocks are trading at about 29 times forward earnings, still below late 2024 levels, and lower than their long-term average premium relative to the S&P 500.
For investors, this means there is still upside for technology stocks, while industrials and other tech stocks appear overvalued.
Earnings season performance exceeds expectations, but growth is clearly concentrated
Barclays said the second-quarter 2025 earnings season delivered impressive results. S&P 500 EPS grew 10.6% year-on-year, sales grew 6.1%. The breadth and depth of earnings surprises both exceeded long-term trends. Both the positive surprise rate and the degree of surprise were close to their highest in four years.
Despite overall standout performance, growth remains highly concentrated in a few sectors. This quarter, EPS for large tech stocks grew 27.6%, other stocks in the tech sector grew 19.7%, far exceeding the long-term average of 8.7%. Communication services was the brightest performer, growing 24.8%.
This strong performance was mainly driven by a small number of sectors. TMT (technology, media, and telecommunications), especially large tech stocks, and the financial sector remain the main drivers of S&P 500 EPS growth, margin expansion, and operating leverage. By contrast, apart from Amazon, consumer, materials, and utilities sectors were weak, with the largest shortfall versus their long-term growth pace in EPS this quarter.
In terms of profitability, profit margins in communication services and finance saw the most significant improvements, and were the only two sectors to achieve positive operating leverage. Energy, utilities, and materials sectors saw margin declines and negative operating leverage.
Valuation Divergence: Tech stocks reasonable, industrials overheated
The current S&P 500 PE ratio oscillates between 22-22.5 times, a level Barclays has previously considered may not necessarily be a performance resistance.
The key is that large tech stocks, the main engine of S&P 500 EPS growth, are currently trading at about 29x forward PE, still below the end of 2024, and lower than their long-term average premium relative to the S&P 500.
By contrast, industrials and other tech stocks appear overvalued. Industrials are currently trading at 25x PE, a historically high relative valuation versus the S&P 500, mainly driven by aerospace-defense and electrical equipment, reflecting the two hot themes of fiscal spending and data center/AI investment.
Excluding tech, the S&P 500 constituents' valuations stayed close to 20x, roughly flat versus the start of the year. Against the background of overall market risk appetite, defensive sectors show lower-than-average premiums or higher-than-average discounts relative to the S&P 500.
Additionally, Wall Street has significantly raised the S&P 500's full-year 2025 EPS forecast from $264 to $268, mainly driven by large tech, industrials, and financials. In contrast, non-essential consumer (excluding Amazon), staples, health care, and utilities dragged down overall expectations.
Tariff worries ease but linger, companies cautious on pricing, AI discussion continues to expand
Barclays, using AI to analyze earnings calls, found that though tariff and pricing concerns remain high, they have eased from last quarter. The percentage of executives discussing tariffs or trade fell from 90% in Q1 to 76%, and the average number of mentions was almost halved.
Discussions about the impact of tariffs "next year" have increased, but from a low base, appearing in only 1-3% of earnings calls. Executives are more optimistic on inventory levels: mentions of "high inventory" fell and mentions of "competitive inventory" increased, indicating that inventory levels are closer to comfortable ranges.
The proportion of executives discussing "pricing" or price "increase" fell to 75%, implying companies are not planning widespread price hikes. This supports the view that tariff uncertainty has peaked and mitigation efforts are effective, but trade and macro uncertainty remain managements' focus.
Moreover, about 55% of executives discussed general AI topics such as artificial intelligence, big data, large language models in earnings calls, continuing a steady upward trend. By contrast, only about 2% mentioned specific AI technical developments such as deep learning or prompt engineering.
AI discussions focused more on efficiency improvements: over 3% of earnings calls linked AI topics with "efficiency." This quarter, AI was associated more with "impact" and "improvement," and less with "cost."
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