Tech giants expose the challenge of intangible metrics

A P/E ratio, or price-to-earnings ratio, is a commonly used metric that gives us a sense of whether a company is expensive relative to its earnings. While it's not a perfect measure, it remains a useful data point to gauge current market levels compared to historical ones.

- Matthew Matthee

The current P/E ratio sits well above its historical average. This suggests that the market is potentially expensive.

Historically, expensive markets have tended to deliver lower returns (the ideal strategy is to buy low, not high), which naturally raises concerns about future performance.

A significant factor behind this elevated P/E ratio is a small group of technology companies that have driven much of the market's growth over the past decade.

When we exclude these seven companies - Apple, Google, Microsoft, Facebook, Nvidia, Tesla and Amazon, known as the "Magnificent Seven" - the P/E ratio of the broader market moves closer to historical averages.

This indicates that these tech giants are a major contributor to the market's current "expensive" valuation.