Investors

Clippers owner Steve Ballmer is being sued by 11 former investors in the sustainability firm Aspiration Partners.

Ballmer was added this week as a defendant in an existing civil lawsuit against Aspiration co-founder Joseph Sanberg and several others associated with the now-defunct company. Ballmer and the other defendants are accused of fraud and aiding and abetting fraud, with the plaintiffs seeking at least $50 million in damages.

“This is an action to recover millions of dollars that Plaintiffs were defrauded into investing, directly or indirectly, in CTN Holdings, Inc. (‘Catona’), previously known as Aspiration Partners, Inc,” reads the lawsuit, which was initially filed July 9 in Los Angeles County Superior Court, Central District.

Attorney Skip Miller said his firm, Miller Barondess LLP, filed an amended complaint Monday that added the billionaire team owner and his investment company, Ballmer Group, as defendants in light of recent allegations that a $28-million deal between Aspiration and Clippers star Kawhi Leonard helped the team circumvent the NBA’s salary cap.

“Ballmer was the perfect deep-pocket partner to fund Catona’s flagging operations and lend legitimacy to Catona’s carbon credit business,” says the amended complaint, which has been viewed by The Times. “Since Ballmer had publicly promoted himself as an advocate for sustainability, Catona was an ideal vehicle for Ballmer to secretly circumvent the NBA salary cap while purporting to support the company as a legitimate environmentalist investor.”

Although Ballmer did invest millions in Aspiration, it is not known whether he was aware of or played a role in facilitating the company’s deal with Leonard. The Times reached out to the Clippers for a comment from Ballmer or a team representative but did not receive an immediate response.

CTN Holdings filed for bankruptcy in March and, according to the lawsuit, is no longer in operation.

In late August, Sanberg agreed to plead guilty in federal court to a scheme to defraud investors and lenders of more than $248 million. On Sept. 3, investigative journalist Pablo Torre reported on his podcast that after reviewing numerous documents and conducting interviews with former employees of the now-defunct firm, he did not find evidence of any marketing or endorsement work done by Leonard for the company.

That was news to the plaintiffs, according to their amended lawsuit.

“Ballmer’s purported status as a legitimate investor in Catona was material to Plaintiffs’ decision to invest in and/or keep their investments with Catona,” the complaint states.

It also says that “Sanberg and Ballmer never disclosed to Plaintiffs that the millions of dollars Ballmer injected into Catona were meant to allow Ballmer to funnel compensation to Leonard in violation of NBA rules and keep Catona’s failing business afloat financially. Sanberg and Ballmer’s scheme to pay Leonard through Catona to evade the NBA’s salary cap was only later revealed in 2025, by journalist Pablo Torre.”

Miller said in a statement to The Times: “A lot of people including our clients got hurt badly in this case. This lawsuit is being brought to make them whole for their losses. I look forward to our day in court for justice.”

The NBA announced an investigation into the matter in early September. Speaking at a forum that month hosted by the Sports Business Journal, Ballmer said that he felt “quite confident … that we abided [by] the rules. So, I welcome the investigation that the NBA is doing.”

The Clippers said in a statement at the time: “Neither Mr. Ballmer nor the Clippers circumvented the salary cap or engaged in any misconduct related to Aspiration. Any contrary assertion is provably false: The team ended its relationship with Aspiration years ago, during the 2022-23 season, when Aspiration defaulted on its obligations.

“Neither the Clippers nor Mr. Ballmer was aware of any improper activity by Aspiration or its co-founder until after the government instituted its investigation.”

Leonard also has denied being involved in any wrongdoing associated with his deal with the now-defunct firm. Asked about the matter Sept. 29 during Clippers media day to open training camp, Leonard said, “I don’t think it’s accurate” that he provided no endorsement services to the company. He added that he hadn’t been paid all the money due to him from the deal.

When Jerome Powell speaks, markets listen. As well they should. Powell serves as the chair of the Federal Reserve Board. As part of this role, he also leads the Federal Reserve Open Market Committee (FOMC), which sets the monetary policy of the U.S.

Powell recently hinted at a monetary policy change that seems positive for the stock market. But should investors actually be worried?

Federal Reserve Chair Jerome Powell answers reporters’ questions at the FOMC press conference on Sept.17, 2025. Official Federal Reserve Photo.

Good news for investors?

Powell spoke last week at the National Association for Business Economics conference held in Philadelphia, Pennsylvania. One of his key points in his address was an update on the status of the Fed’s “quantitative tightening” approach.

Quantitative tightening is the term used to describe when the Federal Reserve reduces the size of its balance sheet. To accomplish this goal, the Fed allows assets such as government-issued bonds to mature, or it actively sells those assets. This usually results in higher long-term interest rates, lower inflation, and a cooling down of an overheated economy.

The opposite of quantitative tightening is quantitative easing. With this approach, the Fed increases the size of its balance sheet. Quantitative easing is an expansionary policy that’s usually associated with a rising stock market.

In his recent remarks, Powell hinted that the Fed is close to ending its program of quantitative tightening. He said:

Our long-stated plan is to stop balance sheet runoff when reserves are somewhat above the level we judge consistent with ample reserve conditions. We may approach that point in coming months, and we are closely monitoring a wide range of indicators to inform this decision.

Powell always chooses his words deliberately and can often be somewhat ambiguous. However, the takeaway from his comments is that the Fed’s quantitative tightening policies could be almost over. This would seem to be good news for investors.

A more complicated picture

I chose those words deliberately and left room for ambiguity just as Powell likes to do. Why? Because there’s a more complicated picture if the Fed stops its quantitative tightening policies.

For one thing, the end of quantitative tightening doesn’t necessarily mean a return of robust quantitative easing. Some saw quantitative easing as something akin to steroids for the economy and stock market, while quantitative tightening was like a depressant. Using that analogy, discontinuing taking a depressant doesn’t boost strength in the same way as frequently taking a steroid might.

It’s also important to understand that the end of quantitative tightening could be a warning sign about the economy, and by extension, corporate earnings. The Fed doesn’t reduce the size of its balance sheet when the economy is weak. Powell’s remarks, indicating that quantitative tightening could soon taper off, might reflect significant underlying concerns by the Fed about the health of the U.S. economy, despite his seemingly positive statement last week that the economy “may be on a somewhat firmer trajectory than expected.” As the economy goes, so goes the stock market — usually.

Finally, there is a real risk that ending quantitative tightening could backfire. One of the main goals of the policy is to fight inflation. If the Fed returns to expanding its balance sheet, inflation could roar back. The effects of the Trump administration’s tariffs could add fuel to the fire, at least initially. Powell acknowledged in his speech at the National Association for Business Economics conference, “There is no risk-free path for policy as we navigate the tension between our employment and inflation goals.”

The Fed could find itself in a situation where it has to reverse tactics, which would likely create significant uncertainty for the stock market. If there’s anything investors hate, it’s uncertainty.

Should investors worry?

I think celebrating the Fed bringing its quantitative tightening policies to a halt is premature. However, it’s also too soon to worry about the potential impact on stocks from the decision.

We don’t know yet how quickly the Fed will begin increasing the size of its balance sheet. We don’t know how aggressively it will move if and when quantitative tightening comes to an end. We don’t know what else will be happening with the economy or the stock market.

What we do know, though, is that the stock market rises over the long term. Anyone with an investing time horizon measured in decades shouldn’t have anything to worry about, regardless of what the Fed does or doesn’t do in the near term.

With roughly 10 weeks to go before 2025 comes to a close, it looks as if it’ll be another banner year on Wall Street — and the evolution of artificial intelligence (AI) is a big reason why.

Empowering software and systems with AI capabilities affords them the opportunity to make split-second decisions and become more efficient at their assigned tasks without human intervention. It’s a game-changing technology that the analysts at PwC believe can add $15.7 trillion to the global economy by the turn of the decade.

Although dozens of public companies have benefited from the AI revolution, none have taken their spot on Wall Street’s mantle quite like Nvidia (NVDA 0.86%), the largest publicly traded company, and Palantir Technologies (PLTR 0.11%). Since 2022 came to a close, Nvidia stock has rocketed higher by more than 1,100% and added over $4 trillion in market value. Meanwhile, Palantir shares are approaching a nearly 2,700% cumulative gain, as of the closing bell on Oct. 16, 2025.

Image source: Getty Images.

While there’s a laundry list of reasons that can justify the breathtaking rallies we’ve witnessed in both companies, this dynamic AI duo has also issued a very clear warning to Wall Street that can’t be swept under the rug.

Nvidia’s and Palantir’s success derives from their sustainable moats

There are few business characteristics investors appreciate more than sustainable moats. Companies that possess superior technology, production methods, or platforms don’t have to worry about competitors siphoning away their customers.

Nvidia is best known for its world-leading graphics processing units (GPUs), which act as the brains of enterprise AI-accelerated data centers. Though estimates vary, Nvidia is believed to control 90% or more of the AI-GPUs currently deployed in corporate data centers.

No external GPU developers have come close to challenging Nvidia’s Hopper (H100), Blackwell, or Blackwell Ultra chips, in terms of compute abilities. With CEO Jensen Huang targeting the release of a new advanced AI chip in the latter half of 2026 and 2027, it seems highly unlikely that Nvidia will cede much of its AI-GPU data center share anytime soon.

To add fuel to the fire, Nvidia’s CUDA software platform has served as an unsung hero. This is the toolkit used by developers to build and train large language models, as well as maximize the compute abilities of their Nvidia hardware. The value of this software is exemplified by Nvidia’s ability to keep its clients within its ecosystem of products and services.

Meanwhile, the beauty of Palantir’s operating model is that no other company exists that can match its two core AI- and machine learning-inspired platforms at scale.

Gotham is Palantir’s true breadwinner. This software-as-a-service platform is used by the U.S. government and its primary allies to plan and oversee military missions, as well as gather and analyze data. The other core platform is Foundry, which is a subscription-based service for businesses looking to make sense of their data and automate some aspects of their operations to improve efficiency.

Palantir’s government contracts have supported a consistent annual sales growth rate of 25% or above, and played a key role in pushing the company to recurring profitability well ahead of Wall Street’s consensus forecast.

Yet in spite of these well-defined competitive edges, this AI-inspired dynamic duo has offered a stark warning to Wall Street and investors.

Image source: Getty Images.

Nvidia’s and Palantir’s insiders are sending a clear message to Wall Street

Though AI has been the hottest thing since sliced bread over the last three years, it’s not without headwinds.

For example, every next-big-thing technology and hyped innovation since (and including) the advent of the internet more than 30 years ago has endured an early innings bubble-bursting event. This is to say that all new technologies have needed time to mature, and evidence of that maturation isn’t wholly evident from the companies investing in AI solutions.

But perhaps the most damning message of all comes from the insiders at Nvidia and Palantir Technologies.

An “insider” refers to a high-ranking employee, member of the board, or beneficial owner holding at least 10% of a company’s outstanding shares. These are folks who may possess non-public information and know their company better than anyone on Wall Street or Main Street.

Insiders of publicly traded companies are required to be transparent with their trading activity. No later than two business days following a transaction — buying or selling shares of their company, or exercising options — insiders are required to file Form 4 with the Securities and Exchange Commission. These filings tell quite the tale with these two high-flying AI stocks.

Over the trailing five-year period, net-selling activity by insiders is as follows:

• Nvidia: $5.342 billion in net selling of shares
• Palantir: $7.178 billion in net selling of shares

In other words, insiders at the two hottest stocks in the AI arena have, collectively, sold $12.5 billion more of their own company’s stock than has been purchased since Oct. 16, 2020.

The stipulation to this publicly reported data is that most executive and board members at public companies receive their compensation in the form of common stock and/or options. To cover the federal and/or state tax liability tied to their compensation, company insiders often sell stock. In short, there are viable reasons for insiders to head for the exit that aren’t necessarily bad news.

What may be even more telling with Nvidia and Palantir Technologies is the complete lack of insider buying we’ve witnessed. The last time an Nvidia executive or board member purchased stock, based on Form 4 filings, was in early December 2020. Meanwhile, there’s been just one purchase by an executive or board member for Palantir since the company went public in late September 2020.

Neither Nvidia nor Palantir Technologies are inexpensive stocks, based on their price-to-sales (P/S) ratios. Over the trailing-12-month period, Nvidia and Palantir are valued at P/S ratios of 27 and 131, respectively. History tells us both figures aren’t sustainable over an extended period.

If no insiders from either company are willing to buy shares of their own stock, why should everyday investors?

This is an uncertain world and there are very few sure things. As Ben Franklin once observed, “nothing is certain except death and taxes.” But I think investors can almost add a third thing to that item — the trusty real estate dividend stock Realty Income (O 1.10%) and its ability to keep paying investors, no matter what the market looks like.

Realty Income is perhaps the most reliable dividend stock you can find. And it’s a well-deserved mantle. Realty Income just declared its 664th consecutive monthly dividend since the company was founded in 1969 — a streak that goes back more than 55 years. The company has also increased its dividend 132 times in that period, giving Realty Income shareholders a rare blend of growth and income.

This California-based real estate investment trust (REIT), is a no-brainer dividend stock to buy, and is a perfect investment for anyone looking to build their dividend portfolio over a long period of time.

About Realty Income

Realty Income is based in California, but it has a massive presence. The company has 15,600 commercial properties, located in every U.S. state and much of Europe. Realty Income’s customers represent 91 separate industries and include more than 1,600 clients.

And most importantly, the company’s portfolio has an occupancy rate of 98.5% — meaning that Realty Income is assured of a consistent revenue stream. That’s how it can afford to pay a consistent, reliable monthly dividend. Industries the company leases property to include grocery stores, convenience stores, home improvement stores, dollar stores, restaurants, drug stores, health and fitness centers, and more.

The company also diversifies its portfolio, which means a catastrophic failure in an industry or by a single business won’t hurt its operations. Convenience store chain 7-Eleven is the biggest tenant  for Realty Income, and even then it’s only a 3.4% weighting.

Data source: Realty Income. Data as of June 30, 2025. 

Realty Income stock performance

Unsurprisingly, real estate stocks haven’t done well for much of the year. The S&P 500 real estate sector as a whole is up only 4%, thanks to the weak housing market and high interest rates that make borrowing more expensive. But Realty Income has been able to shake off those pressures. The stock is up 11% on the year, and when you calculate the total return of reinvesting dividend payments, the return is more than 15%.

O data by YCharts

The company recorded $1.41 billion in revenue in the second quarter, up from $1.34 billion a year ago. Income was down, however, thanks to borrowing costs — the company recorded $196.9 million and $0.22 per share versus $256.8 million and $0.29 per share a year ago.

Realty Income lowered its full-year guidance, with net income now expected to be $1.29 to $1.33 per share, from previous guidance of $1.40 to $1.46 per share.

Image source: Getty Images.

The case for Realty Income

There’s nothing flashy about this stock. But that’s fine — not everything in your portfolio needs to be a shiny new toy. Realty Income’s strength comes with its consistency and long-term growth window.

An investment 10 years ago in Realty Income would give you $20,270 today, assuming that you reinvested all those dividends back into your stock. Had you pocketed the money, you’d still have $12,880 — which all goes to show the power of compound interest.

O data by YCharts

And remember, because Realty Income is a REIT, it’s required by law to disburse 90% of its profits back to shareholders (the current yield is 5.4%). Because it’s a monthly payout instead of a quarterly check, investors get the proceeds quicker, and those funds can work for them rather than working for Realty Income.

If you are an income investor, you really can’t beat Realty Income for its business plan, diversification, and combination of growth and income. If you are a patient investor with a long-term view, Realty Income is a perfect dividend stock.

The Nasdaq Composite‘s brutal 3.6% sell-off on Oct. 10 was a painful reminder of how quickly growth stocks can sell off when doubt creeps in. Friday’s tumble marked the worst session since April during the height of trade tensions between the U.S. and China.

The sell-off was a reaction to the U.S. threatening an additional 100% tariff on Chinese imports as a retaliation for China’s stricter export controls on rare-earth minerals and magnets. These materials and products are used across economic sectors, including semiconductors and technological equipment with artificial intelligence (AI) applications.

On Oct. 12, reports indicated that China would not back down against escalated tariff threats from the U.S.

Investors often talk about buying opportunities when the market is selling off. But it can be just as helpful to be aware of potential mistakes and prevent them before they do damage to your portfolio. Here are three that apply to AI growth stock investors who are preparing for next year.

Image source: Getty Images.

1. Having an overly concentrated AI portfolio

A common mistake is to overly focus on one facet of a value chain.

For example, an investor may own Nvidia (NVDA -0.17%), Broadcom, and Advanced Micro Devices as a way to diversify across different AI chip designers. The issue is that many of these companies have the same customers. For example, OpenAI is buying chips from all three companies to build out 10 gigawatts of data centers. If OpenAI were to cut its spending, it could affect the earnings of all three companies.

Similarly, equipment suppliers like Applied Materials, Lam Research, and ASML all share the same largest customers — which are semiconductor manufacturers like Taiwan Semiconductor, Samsung Electronics, and Intel. So if Taiwan Semi cuts its spending, it would reduce earnings across the semiconductor equipment supplier industry.

Further down the value chain are the cloud computing giants like Amazon Web Services, Microsoft Azure, Alphabet-owned Google Cloud, and Oracle. These companies benefit from increased AI spending, but they also serve general computing and storage needs. A slowdown in AI spending, or a widespread economic downturn, could reduce demand for additional cloud computing usage across major corporations.

By building out an AI portfolio across the value chain rather than focusing on one segment, you can help reduce volatility and limit the damage of an industry-specific pullback.

2. Ignoring position sizing

Portfolio sizing and allocation are just as important as the stocks and exchange-traded funds owned. You don’t want to be so diversified that your best ideas don’t make a big impact, but you also don’t want to be overly concentrated to the point where a handful of stocks can damage your financial health.

There’s no one-size-fits-all solution to diversification. But factors to consider include investment goals, investment time horizon, and risk tolerance.

A risk-averse investor would probably want to limit the size of a single stock in their financial portfolio, whereas an investor with a high risk tolerance and a multi-decade time horizon may not mind betting big on a handful of stocks, especially if they are still making new contributions to their investment accounts.

3. Buying stocks and not companies

Building a diversified portfolio isn’t enough. In fact, it’s not even the most important factor.

Arguably, the greatest mistake investors can make when approaching AI is to invest in stocks rather than companies. In other words, focusing too much on price action and potential gains rather than on what a company does and where it could be headed.

Peter Lynch’s investment advice to “know what you own, and why you own it,” still rings true today. Without conviction, a concoction of emotion and volatility can corrode the foundations of even the strongest portfolios. An investor may hold positions in stocks just because they are going up, even if those gains are temporary, because they don’t have to do with the underlying investment thesis.

The best investments are the ones you can put a decent amount of your portfolio into and be confident in owning, even if they suffer an extreme sell-off — like we saw in April during the height of trade tensions. If someone bought Nvidia just to make a quick buck, they may have been tempted to sell it when it fell by over 37% from its high in early April. Or when it dropped over 55% from its high in 2022. But someone investing in Nvidia for its multi-decade potential in AI data centers would have had an easier time holding the stock throughout these volatile periods.

Unlocking lasting success in the stock market

Diversifying across the AI value chain in companies you understand and with an awareness of portfolio sizing can help you build a portfolio that’s built to last, rather than one that can get hot only if the conditions are right.

Long-term investors know that success is more about making consistently good decisions over an extended period, rather than a few great ideas wedged between mediocrity and mistakes.

AI stocks have generated monster returns for patient investors, and many have the potential to create lasting generational wealth going forward. But those gains could take time, with many bumps along the way.

No one knows when the next major stock market sell-off will occur. Instead of guessing the timing and severity of a sell-off, it’s better to put your effort into following great companies and limiting mistakes.

In sum, diversification, conviction, and good companies are components that can help you build an investment suspension system capable of absorbing sell-off shocks.

On October 14, 2025, CCLA Investment Management disclosed it had sold its entire position in NICE (NICE -1.26%) in an estimated $120.03 million transaction.

What Happened

According to a filing with the Securities and Exchange Commission dated October 14, 2025, CCLA Investment Management exited its holding in NICE by selling all 710,865 shares, with an estimated trade value of $120.03 million.

What Else to Know

CCLA Investment Management sold out of NICE, reducing its post-trade stake to zero; the position now represents 0% of 13F AUM.

Top holdings following the filing:

• NASDAQ:MSFT – $369.63 million (5.9% of AUM) as of September 30, 2025
• NASDAQ:GOOGL – $345.87 million (5.5% of AUM) as of September 30, 2025
• NASDAQ:AMZN – $269.0 million (4.3% of AUM) as of September 30, 2025
• NASDAQ:AVGO – $207.92 million (3.3% of AUM) as of September 30, 2025
• NYSE:V – $180.65 million (2.9% of AUM) as of September 30, 2025

As of October 13, 2025, shares of NICE were priced at $132.00, marking a 23.8% decrease over the year ended October 13, 2025. Over the same period, shares have underperformed the S&P 500 by 35.5 percentage points.

Company Overview

Company Snapshot

NICE Ltd. delivers AI-powered cloud software solutions designed to optimize customer experience and enhance compliance for enterprises and public sector organizations worldwide. The company leverages a broad portfolio of proprietary platforms and analytics tools to address complex business needs in digital transformation, financial crime prevention, and operational efficiency.

The company offers AI-driven cloud platforms for customer experience, financial crime prevention, analytics, and digital evidence management, including flagship products such as CXone, Enlighten, and X-Sight.

NICE Ltd. serves a global client base of enterprises, contact centers, financial institutions, and public safety agencies seeking advanced automation, compliance, and customer engagement solutions. It operates a subscription-based business model, generating revenue from cloud services, software licensing, and value-added solutions for enterprise and public sector clients.

Foolish Take

In a recent regulatory filing, CCLA Investment Management revealed that it has completely sold out of its ~$120 million position in NICE, an Israeli software company. This move comes following a tough period for NICE stock.

Over the last five years, the company’s stock has consistently underperformed the broader market. Shares have logged a total return of (44%) over this period, equating to a compound annual growth rate (CAGR) of (11%). This compares quite unfavorably to the S&P 500, which has generated a total return of 105% over the last five years, equating to a CAGR of 15%.

All that said, NICE’s stock performance doesn’t reflect its underlying fundamentals. Total revenue, net income, and free cash flow have all increased significantly over the last five years, indicating strength in the company’s business model, which relies on artificial intelligence (AI) to power applications serving contact centers, financial institutions, and public safety organizations. Moreover, the company recently announced plans to buy back up to $500 million worth of its outstanding shares, which could help put a floor under its share price.

While CCLA’s recent sale does indicate the deterioration of some institutional support, retail investors may want to take a look at NICE — an under-the-radar AI growth stock.

Glossary

13F reportable assets: Assets disclosed by institutional investment managers in quarterly SEC Form 13F filings.

AUM (Assets Under Management): The total market value of investments managed by a fund or investment firm on behalf of clients.

Quarterly average price: The average price of a security over a specific quarter, often used to estimate transaction values.

Post-trade stake: The number of shares or value held in a position after a trade is completed.

Flagship products: A company’s leading or most prominent products, often representing its brand or core offerings.

Cloud platforms: Online computing environments that provide scalable software and services over the internet.

Digital evidence management: Systems for storing, organizing, and analyzing electronic data used in investigations or compliance.

Financial crime prevention: Technologies and practices designed to detect and stop illegal financial activities, such as fraud or money laundering.

Compliance: Adhering to laws, regulations, and industry standards relevant to a business or sector.

TTM: The 12-month period ending with the most recent quarterly report.

Operational efficiency: The ability of a company to deliver products or services using minimal resources and costs.

If you’re thinking about investing in the stock market today, you may be wondering whether it’s a better idea to go with the big names in the “Magnificent Seven” or to simply hold a position in the entire S&P 500.

The Magnificent Seven refers to some of the most prominent growth stocks in the world: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. Investing in these companies has yielded strong returns for investors over the years. Meanwhile, the S&P 500 makes for a more balanced investment overall, as it gives investors broader exposure to the market while still growing over the long term. By having a position in the 500 best stocks rather than just the top seven, there’s much more diversification.

Which option should you go with today, if your focus is on long-term growth?

Image source: Getty Images.

The Magnificent Seven are magnificent, but they could be overdue for a decline

One way you can gain exposure to the Magnificent Seven is by investing in the Roundhill Magnificent Seven ETF (MAGS -3.81%). The fund invests in just the Magnificent Seven and, thus, can be an easier option than investing in each stock individually. Since its launch in April 2023, the fund has soundly outperformed the S&P 500, rising by more than 165% while the broader index has achieved gains of around 64%.

Many of the Magnificent Seven have benefited from an uptick in demand due to artificial intelligence (AI) and have been investing heavily in next-gen technologies. However, many investors worry that a bubble has already formed around AI stocks and that spending could slow down, especially if there’s a recession on the horizon. If that happens, then these stocks could be susceptible to significant declines.

While these stocks have been flying high of late, back in 2022, when the market was in turmoil due to rising inflation and as investor sentiment was souring on growth stocks, each of the Magnificent Seven stocks fell by more than 26%. The worst-performing stocks were Meta and Tesla, which lost around 65% of their value. That year, the S&P 500 also fell, but at 19%, it was a more modest decline.

The S&P 500 is more diverse, but that doesn’t mean it’s risk-free

If you want to have exposure to the S&P 500, you can accomplish that by investing in an S&P 500 index fund, such as the SPDR S&P 500 ETF (SPY -2.67%). Its low expense ratio of 0.09% makes it a low-cost, no-nonsense way of tracking the S&P 500. Its focus is to simply mirror the index, and it does a great job of that.

The problem, however, is that while the S&P 500 will give you exposure to more stocks than just the seven best stocks in the world, how those leading stocks do will still have a significant impact on the overall stock market. And the Magnificent Seven, because they are so valuable, are also among the SPDR ETF’s largest holdings.

But even if you were to go with a more balanced exchange-traded fund, such as the Invesco S&P 500 Equal Weight ETF, which has an equal position in all S&P 500 stocks, that may only offer modest protection from a wide-scale sell-off. In 2022, the ETF declined by 13%.

You’re always going to face some risk when investing in the stock market, especially if your focus is on growth stocks, which can be particularly volatile.

What’s the better strategy for growth investors?

If your priority is growth, then going with the Magnificent Seven can still be the best option moving forward. These stocks will undoubtedly have bad years, but that’s the risk that comes with growth stocks. However, given their dominance in tech and AI, the Magnificent Seven still have the potential to vastly outperform the S&P 500 in the long run, and their gains are likely to far outweigh their losses.

Warren Buffett is well known for being perhaps the greatest stock picker of all time, and for good reasons. Berkshire Hathaway (BRK.A -0.88%) (BRK.B -1.03%), the conglomerate Buffett has led since the mid-1960s, has delivered unbelievable returns for investors over the years, and a big reason is Buffett’s success with using Berkshire’s capital to invest in stocks.

What makes Buffett’s investing style so extraordinary is how simple it is. Buffett invests in great businesses (mostly ‘boring’ ones) that he believes trade for significantly less than their intrinsic value and holds them for as long as they remain great businesses.

He doesn’t chase technology stocks or try to get in on the ground floor of the ‘next big thing.’ He doesn’t trade short-term. And he uses fairly basic investment principles, which he often shares with everyday investors. In addition to being the most successful investor, he is also the most quotable.

Image source: Getty Images.

Buffett’s advice to the average investor

Yes, Warren Buffett has an extraordinary track record when it comes to choosing individual stocks to invest in. But it’s also important to know that he spends many hours (usually over 10 per day) researching and reading.

Of course, you don’t need to spend that much time, but the point is that being a successful individual stock investor requires time and knowledge. As Buffett says, “If you like spending six to eight hours per week working on investments, do it. If you don’t, then dollar-cost average into index funds.”

To be perfectly clear, Buffett doesn’t think there’s anything wrong with this option. In fact, he has directed that his own wife’s inheritance be invested in this way after he’s gone.

Buffett has specifically mentioned the S&P 500 as a great way to bet on American business. And he says that “American business — and consequently a basket of stocks — is virtually certain to be worth far more in the years ahead.”

Buffett is a big fan of this S&P 500 ETF

There are several excellent S&P 500 index funds in the market, but one that Buffett has owned in Berkshire Hathaway‘s portfolio is the Vanguard S&P 500 ETF (VOO -1.28%). This fund simply tracks the 500 stocks in the index, in their respective weights, and should mimic the performance of the benchmark index over time.

Buffett is a big fan of Vanguard, which pioneered the low-cost index fund years ago. The Vanguard S&P 500 ETF has a rock-bottom 0.03% expense ratio, which means that you’ll pay just $0.30 in annual investment fees for every $1,000 in assets. To be clear, this isn’t a fee you physically have to pay — it will just be reflected in the fund’s performance over time. But it’s so low that it will barely have any impact on your long-term results.

You might be surprised at the potential

One final Buffett quote I’ll leave you with is “it isn’t necessary to do extraordinary things to get extraordinary results.” And it certainly applies to index fund investing.

Over the long run, the S&P 500 has produced annualized returns of about 10% over long periods of time. Let’s say that you invest just $200 per month in the Vanguard S&P 500 ETF and that you achieve 10% returns going forward.

• In 10 years, you’d have about $38,250.
• In 20 years, you’d have $137,460.
• In 30 years, you’d have nearly $395,000.
• In 40 years, you’d have about $1.06 million.

The key is to invest consistently and hold for a long time. The magic of long-term compounding will do the heavy lifting for you. As you can see, if you’re not comfortable with picking individual stocks, it doesn’t necessarily mean that you can’t use the stock market to build extraordinary wealth over time.

Palantir Technologies (PLTR 0.79%) is one of the most popular artificial intelligence (AI) stocks on the market, especially among retail investors. Shares have advanced 140% year to date, after skyrocketing 340% last year. And the company recently got a big vote of confidence from a Wall Street analyst.

Mariana Perez Mora, who covers aerospace and defense at Bank of America, recently raised her target price to $215 per share, up from $180 per share. Mora’s forecast is now the most bullish on Wall Street, and it implies 17% upside from the current share price of $183.

Here’s what investors should know about Palantir.

Image source: Getty Images.

Palantir is a leader in artificial intelligence platforms

In her recent note, Bank of America analyst Mariana Perez Mora highlighted two qualities that differentiate Palantir. First, the company uses what it calls forward-deployed engineers (FDEs), developers that work directly with specific clients to build custom solutions. FDEs are a particularly compelling value proposition as more companies look to integrate artificial intelligence into workflows.

Second, Palantir designed its software around an ontology, a framework that serves as the digital twin of an organization. Think of an ontology as a cause-and-effect diagram that uses digital information to define the relationship between physical objects. It lets clients easily troubleshot, automate, and optimize business processes with artificial intelligence.

In short, whereas most analytics tools are built around data, Palantir designed its software around a decision-making framework. Chief Technology Officer Shyam Sankar told analysts on the second-quarter earnings call, “Our foundational investments in ontology and infrastructure have positioned us uniquely to deliver on AI demand.”

Indeed, Forrester Research ranked Palantir as the technology leader in its most recent report on artificial intelligence and machine learning (ML) platforms, awarding its AIP platform higher scores than similar products from Amazon, Microsoft, and Alphabet. And IDC ranked the company as the market leader in its latest report on decision intelligence software.

Bank of America says Palantir’s revenue could reach $18 billion annually by 2030

Palantir currently earns the majority of its revenue from government customers, and that business segment has regained its momentum due to demand for AI among defense and intelligence agencies. Government revenue growth has accelerated in six consecutive quarters and adoption is expanding beyond the U.S.

NATO earlier this year acquired Palantir’s Maven Smart System, an AI-powered warfighting platform already used across the U.S. military to improve battlefield targeting and supply chains. More recently, Palantir struck a five-year, 750 million-pound deal with the U.K. Ministry of Defense to help the U.K. military develop AI capabilities. That is the largest government contract outside the U.S. to date.

Mora at Bank of America thinks that momentum will continue as more countries consider the Maven Smart System. She estimates government revenue will reach $8 billion annually by 2030. However, Mora expects commercial revenue to eclipse that figure, reaching $10 billion by the end of the decade, as enterprises choose to buy Palantir’s AI operating system rather than build their own.

To summarize, Mora believes demand for artificial intelligence will be a major catalyst for Palantir, pushing total revenue to $18 billion annually by 2030. To put that in context, the company reported $3.4 billion in revenue over the last 12 months, so her forecast implies revenue growth of 35% annually over the next five-plus years.

Palantir is the most expensive stock in the S&P 500 several times over

Palantir is well positioned for future growth. Grand View Research estimates the data analytics market will expand at 29% annually through 2030, driven by demand for artificial intelligence and machine learning tools. As the market leader in decision intelligence software with deep expertise in AI/ML, Palantir is likely to report faster revenue growth than the overall market.

However, that still doesn’t justify the current valuation of 134 times sales. For context, the next closest stock in the S&P 500 is AppLovin with a price-to-sales multiple of 39. That means Palantir could lose 70% of its market value and still be the most expensive stock in the index.

Consider this scenario: If Bank of America is correct in forecasting $18 billion in revenue in 2030, Palantir would still trade at 24 times sales by that point if its stock price does not change at all. Only eight stocks in the S&P 500 currently have valuations above 24 times sales, so Palantir would still be one of the most expensive stocks in the index (by current standards) without any share price appreciation in the next five-plus years.

Here’s the bottom line: Palantir is an excellent business, but the stock is wildly overvalued. That does not mean shares will decline anytime soon. Palantir could very well reach Mora’s target price of $215 per share. But the risk-reward profile is undoubtedly skewed to the downside, so investors should make the prudent choice and look elsewhere. There are plenty of other AI stocks with more favorable risk-reward profiles.

You’re reading a free article with opinions that may differ
from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to
get instant access to our top analyst recommendations, in-depth research, investing resources,
and more. Learn More

October is a busy month for the stock market, because it’s when companies start reporting their operating results for the quarter ended Sept. 30. As has been the case for the last few years, Wall Street will be laser-focused on the tech giants powering the artificial intelligence (AI) revolution, because they typically deliver the fastest revenue and earnings growth.

Meta Platforms (META -0.37%) is one of those companies. It’s scheduled to release its third-quarter results on Oct. 29, and management’s guidance points to a further acceleration in its revenue growth, thanks largely to AI. The upcoming report could be a very positive catalyst for Meta stock, so here’s why investors might want to pay attention.

Image source: Getty Images.

Look for accelerating revenue growth

More than 3.4 billion people use at least one of Meta’s social media apps every single day, which include Facebook, Instagram, and WhatsApp. Considering that is nearly half the population of the entire planet, finding new users is getting harder and harder, which is why the company is focused on boosting engagement instead.

Simply put, the longer each user spends on Meta’s apps, the more ads they see, and the more money the company makes. AI is a huge part of that strategy; Meta uses the technology in its algorithms to learn what content each user likes to see, so it can show them more of it. During the second quarter of 2025 (ended June 30), this drove a 6% increase in the amount of time users spent on Instagram compared to the year-ago period, and a 5% increase for Facebook.

Meta adopted a similar strategy for its ad-recommendation engine to target users more accurately on behalf of businesses. During Q2, this led to a 5% increase in conversions on Instagram, and a 3% increase on Facebook. This typically means Meta can charge more money per ad because businesses are yielding a higher return on their marketing spend.

The social media giant generated $47.5 billion in total revenue during the quarter, which was a 22% increase from the year-ago period. That marked an acceleration from the first quarter when revenue jumped by 16%. Management’s guidance suggests the company delivered as much as $50.5 billion in revenue during the third quarter, which would represent even faster growth of 24%.

That would be a very bullish result for Meta stock on Oct. 29.

Here’s an even more important number to watch

Meta’s AI strategy also involves developing new features, like its Meta AI chatbot which can answer complex questions, generate images, or even join your group chat to settle debates. It only launched in late 2023, yet it already has almost a billion monthly active users.

Meta AI is powered by Meta’s Llama family of large language models, which are improving so rapidly that they already rival some of the best models from leading start-ups like OpenAI and Anthropic, even though those companies had a multiyear head start on development. But in order for the Llama models to continue improving, Meta has to invest heavily in data center infrastructure and chips to unlock the necessary computing power.

The company came into 2025 expecting to allocate somewhere between $60 billion and $65 billion to capital expenditures (capex) for the year, but it has since revised those numbers to $66 billion and $72 billion. Meta would only spend that kind of money on AI infrastructure if it expected a positive financial return, and the signs are already there considering the company’s growing engagement, higher ad conversions, and accelerating revenue growth.

A further upward revision to Meta’s 2025 capex forecast on Oct. 29 would probably be bullish for its stock, because it might be a signal that management expects an even bigger payoff than originally anticipated.

Meta’s stock looks like a bargain heading into Oct. 29

Meta shares are trading at a price-to-earnings (P/E) ratio of 25.7 as I write this, making it the cheapest stock in the “Magnificent Seven,” which is the group of tech titans driving the AI revolution forward.

PE Ratio data by YCharts

Personally, I think Meta deserves a much higher valuation considering it grew its earnings per share by a whopping 38% in the second quarter, outpacing the earnings growth of every other Magnificent Seven company except Nvidia.

Typically, investors will pay a premium for a company that is growing quickly, so there might be some upside on the table for Meta stock through multiple expansion alone. If the company’s third-quarter results match or exceed the high end of management’s guidance on Oct. 29, that could be the spark that ignites a powerful rally for the stock into the end of the year.

On Monday, chipmaker Advanced Micro Devices (AMD 23.61%) announced a huge artificial intelligence (AI) strategic partnership with OpenAI, the AI model developer best known for its ChatGPT chatbot. Not only did this news send shares of AMD up a whopping 23.7%, but it also gave a boost to many other AI stocks and the market in general.

AMD’s news came exactly two weeks after its rival Nvidia (NVDA -1.10%), whose graphics processing units (GPUs) dominate the AI chip market, announced a massive deal with OpenAI.

Image source: Getty Images.

Advanced Micro Devices-OpenAI strategic partnership

The AMD-OpenAI strategic partnership involves AMD supplying 6 gigawatts of its Instinct series GPUs to power OpenAI’s next-generation AI infrastructure. The first 1 gigawatt deployment of AMD Instinct MI450 GPUs is set to begin in the second half of 2026. That’s the same time frame involved in the Nvidia-OpenAI deal.

Moreover — and this is big for AMD — “AMD has issued OpenAI a warrant for up to 160 million shares of AMD common stock, structured to vest as specific milestones are achieved,” according to the press release. AMD has a total of about 1.62 billion shares outstanding, so 160 million shares is about 10% of total shares.

For context, before the deal was announced, AMD had a market cap of about $267 billion. Ten percent of that is $26.7 billion.

Putting 6 gigawatts in context

Six gigawatts equates to a ton of computing power. Here are a couple of stats to put 6 gigawatts of power in context:

• New York City’s average power demand is about 6.5 gigawatts, and its peak power demand in the summer is roughly 10 to 11 gigawatts.
• Six large-scale nuclear reactors have a power output of about 6 gigawatts.

Recap of the Nvidia-OpenAI AI deal

On Sept. 27, Nvidia announced its massive deal with OpenAI. The highlights of this strategic partnership:

• The companies plan to deploy at least 10 gigawatts of Nvidia systems for OpenAI’s next-generation AI infrastructure.
• The announcement stated that the systems will be used to “train and run [OpenAI’s] next generation of models on the path to deploying superintelligence.” [Emphasis mine.]
• The first phase is targeted to come online in the second half of 2026 using the Nvidia Vera Rubin platform.
• Nvidia plans to invest up to $100 billion in OpenAI as the new Nvidia systems are deployed.

What are the broader implications for the AI space?

This seems like a win-win deal for both AMD and OpenAI. OpenAI secures a large supply of AI-enabling GPUs over multiple years. This is no small thing, as GPUs are in great demand, so supply has been tight. That’s especially true of Nvidia’s GPUs, but no doubt, also true to some extent for AMD.

On AMD’s part, it secures a huge multiyear customer for its GPUs, and it is poised to get a hefty inflow of cash as OpenAI buys up to 10% of AMD’s shares. The partnership “is expected to deliver tens of billions of dollars in revenue for AMD,” CFO Jean Hu said in the release. Moreover, it’s “expected to be highly accretive to AMD’s non-GAAP [generally accepted accounting principles] earnings per share, ” she added.

Taken together with the recent Nvidia-OpenAI humongous AI deal and other big deals in the space, there are positive implications for the broader AI market.

The main implication, in my opinion, is that these massive AI chip and infrastructure deals should accelerate the race to move beyond generative AI to achieve artificial general intelligence (AGI) and then artificial superintelligence (ASI), as I wrote about after the Nvidia-OpenAI deal was announced. Nvidia and AMD should be two of the big beneficiaries of this race, as companies rush to buy even more of their AI-enabling GPUs.

You’re reading a free article with opinions that may differ
from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to
get instant access to our top analyst recommendations, in-depth research, investing resources,
and more. Learn More

Taiwan Semiconductor (TSMC) (TSM 1.50%) will release earnings for the third quarter of 2025 on Oct. 16. The company produces the majority of the world’s most advanced semiconductors. Since many of the advancements in artificial intelligence (AI) are not possible without its manufacturing capabilities, the stock is likely to remain a market beater over the long term.

Nonetheless, TSMC stock is at an all-time high, and anticipated growth is often not enough of a reason to buy a stock. With an earnings report looming, should investors buy shares of the stock now or stay on the sidelines and hold out for a lower price?

The bull case in TSMC stock

As previously mentioned, TSMC faces a few threats to its long-term bull case. It is the world’s largest semiconductor foundry company, and as of the second quarter of 2025, its market share now exceeds 70%, according to TrendForce. This is up from 67% in the previous quarter.

Additionally, Grand View Research forecasts a compound annual growth rate (CAGR) for AI of 32% through 2033. These combined factors make it highly likely that TSMC’s rapid growth will continue.

For now, it has exceeded that growth rate, and that rapid growth is on track to continue. In the first half of 2025, revenue increased by 40% to $56 billion compared to the same period the previous year. It also stated on its Q2 earnings call that it expects between $31.8 billion and $33 billion in revenue during Q3, representing a 38% rise at the midpoint.

Investors should note that the company beat revenue estimates in each of the previous four reports. Thus, if it beats estimates like it has in previous quarters, the 40% revenue growth rate from the first two quarters of the year could continue into Q3.

Moreover, investors should watch for sales of the most advanced chips, namely those in the 2nm – 5nm size range that power the most advanced AI functions. This is the area where TSMC stands out above competing foundries, since Samsung is the only other chip producer that can manufacture these smaller chips.

Areas of danger

Additionally, even if it is likely to beat earnings estimates, TSMC faces significant challenges.

One is simply keeping up with demand. It allocated almost $20 billion to capital expenditures (CapEx) in the first half of the year, and much of that will go to foundries in Arizona, where it plans to allocate $165 billion to building six advanced manufacturing facilities. Even though that is a considerable sum, it will likely have to maintain or increase that spending to match demand.

Another factor is that the majority of production takes place in Taiwan, which faces considerable geopolitical tensions because of its proximity to China. Investors differ on the danger level, as China can probably not afford to have the supply of chips disrupted by geopolitical events.

Still, investors should also remember that Warren Buffett forced Berkshire Hathaway to sell its TSMC stake for this reason. Hence, investors must remain aware of this concern.

That issue may also be the reason for TSMC’s relatively low valuation. It has traded at an average P/E ratio of 25 over the last five years, far below its key clients such as Apple and Nvidia.

Also, while its current 33 P/E ratio is low for a company with 40% revenue growth, the earnings multiple has rarely exceeded 40 in recent years. That could increase the danger of paying a relative premium for TSMC.

Should investors buy TSMC stock before earnings?

Under current conditions, no obvious factor is pushing investors to either delay or accelerate purchase decisions before the earnings report.

Indeed, nobody knows how TSMC stock will react once the company releases Q3 earnings. Still, some risk-averse investors may feel apprehensive about the report amid the rising P/E ratio.

If that is the case, one strategy is to do both, allocate half of one’s funds to this stock now and wait for the report to spend the additional half. Shareholders who dollar-cost-average into this stock are likely already employing this strategy, and with this near-term outcome unknown, that approach could also work for other investors.

Ultimately, barring the aforementioned geopolitical risks, TSMC stock should remain on a bull trend as it struggles to meet the demand for AI chips. For this reason, time in TSMC is almost certainly more critical to winning with the stock than the timing of one’s purchase decisions.

In January 2024, Office 365 quietly reached 400 million paid seats. Microsoft (MSFT 0.26%) products are as integrated into our professional lives as meetings that could’ve been emails, but these “boring” and decades-old tools are the fuel Microsoft is using to compete in the artificial intelligence (AI) race.

As AI progresses and automates away chunks of the professional world as we know it, the legacy suite of Microsoft 365 products shows no signs of slowing down. This ability to quietly and reliably generate revenue is funding Microsoft’s riskier AI bets.

Office products generated $54.9 billion in fiscal year 2024 (the 12 months ended in June 2024). That was 22% of all of Microsoft’s revenue. Microsoft 365 will keep the company on the leaderboard of AI innovators for years to come. This is great news for long-term Microsoft investors.

Image source: Getty Images.

Microsoft’s lagging AI strategy

Microsoft is still playing catch-up when it comes to generative AI. OpenAI leads with more than 200 million weekly active users and set the gold standard with the release of ChatGPT in 2022. Alphabet‘s Google and Meta Platforms both have models nearly equivalent to OpenAI.

Compared to these companies, Microsoft got a late start in deciding on an AI strategy. However, it has since closed the gap significantly by partnering with competitor OpenAI and, as of the end of 2024, was beginning to build models in-house.

Microsoft also purchased billions in Nvidia chips and continues to innovate on its cloud computing platform, Azure, and agentic powerhouse, Copilot. These strategic moves are, thus far, keeping pace with the other major players in the AI industry.

Microsoft requires immense amounts of capital to remain competitive in the AI landscape. Fortunately, its decades-old productivity and business lines are the stable engine propelling Microsoft into its new, automated era.

The Office moat

Normally, when one thinks of a legacy business, it’s of an outdated, shrinking portion of revenue. That is not the case with Microsoft’s Office products. Microsoft 365, including the applications Excel, Word, PowerPoint, Teams, and Outlook, is still growing by double digits year over year.

This indicates these product lines are not only here to stay, but are so universally adopted by businesses and individuals alike that it’ll be nearly impossible to dethrone them anytime soon.

These products are also mostly recession-resistant, as businesses are unlikely to cut them in an economic downturn. Microsoft also switched to a subscription model more than a decade ago, making revenue from these lines of business extraordinarily predictable and dependable.

The significant growth in the legacy products is also great news for the capital-intensive investments Microsoft will need to continue making for the next several years. Microsoft reports that it’s on track to invest approximately $80 billion to build out AI-enabled data centers for training and deploying AI models and applications.

Microsoft’s AI revenue is exploding

In its earnings call on July 30, Microsoft revealed Azure’s income for the first time: a whopping $75 billion, an increase of 34%, according to chairman and CEO Satya Nadella.

The CEO added, “Cloud and AI is the driving force of business transformation across every industry and sector. We’re innovating across the tech stack to help customers adapt and grow in this new era.”

Microsoft’s market cap is approaching $4 trillion, and there seems to be quite a bit of room left for growth, particularly if the company’s big AI bets pay off.

Microsoft remains a top competitor

For investors, Microsoft remains a solid long-term play, largely because of the stable products users have known for years. With a quarterly dividend of $0.91 per share, investors are rewarded on both the value and growth side, though the dividend yield is under 1%. Microsoft’s burgeoning agentic and innovative technologies will continue to produce massive revenue alongside mature, reliable products.

Overall, Microsoft’s total revenue increased 18% from Q4 2024 to Q4 2025. There’s plenty of risk associated with investing in AI technologies, but thanks to Microsoft’s steady lines of business, the downside is far less than that of many competitors.

At the time of this writing, the S&P 500 (^GSPC 0.34%) is less than 1% off its all-time high and up 73% since the start of 2023. Artificial intelligence (AI) and investor appetite for risk have contributed to the torrid gains, making the market relatively expensive.

You may have seen headlines saying that the S&P 500 is overvalued compared to its historical averages. Or that red-hot growth stocks have run up too fast. But that doesn’t tell the full story.

Three simple valuation metrics — earnings, trailing price-to-earnings ratio, and forward price-to-earnings ratio — explain what’s going on with the market’s valuation. Here’s why they matter, why the S&P 500 isn’t as expensive as it seems, and what that means for your investment portfolio.

Image source: Getty Images.

This growth-driven market commands a premium price

The S&P 500 is an index featuring the 500 largest companies in the U.S. by market cap. The more valuable a company, the greater its influence on the index through its stock price. So a $4.5 trillion-plus company like Nvidia has more than 10 times the influence as a $400 billion company like Home Depot. But that also means Nvidia has 10 times the impact on S&P 500 earnings.

Just like individual companies, the S&P 500 has an earnings per share (EPS) metric. This is just an average of the earnings of each company adjusted for weight in the index. So again, Nvidia’s earnings will have 10-plus times the impact as Home Depot’s.

Ten particularly influential growth stocks, known as the “Ten Titans,” now make up 39% of the S&P 500. But many of these companies are being valued for where they will be several years from now rather than where they are today. Meaning that their price-to-earnings ratios (P/E) and forward P/E ratios are elevated, thereby bloating the valuation of the S&P 500.

According to data from FactSet, the forward P/E of the S&P 500 is 22.5, compared to a five-year average of 19.9 and a 10-year average of 18.6. Based on forward earnings projections for the next year, which tend to favor growth stocks, the S&P 500 is 13.1% pricier than its five-year average and 21% more expensive than its 10-year average. Even if companies live up to expectations, their stock prices may not go up in the near term simply because these results may already be priced in.

Valuation matters less for investors with a long-term time horizon. If the S&P 500 goes nowhere for a year or two but earnings keep growing, the narrative will flip, and the index will look cheap. So the five- or 10-year return could still be solid, reinforcing the importance of approaching the stock market with a long-term time horizon rather than trying to make a quick buck.

S&P 500 gains can be misleading

Using P/E ratios and forward P/E ratios compared to historical averages only tells part of the story. Those two metrics alone may suggest that all stocks are expensive, but that’s not the case.

Data by YCharts.

As mentioned before, the S&P 500 is up 73% since the start of 2023, but the S&P 500 Equal Weight Index has returned just 33.3% — a nearly 40 percentage point difference. Instead of weighting by market cap, the S&P 500 equal-weight gives all S&P 500 components the same influence on the index. Nvidia moves the S&P 500 equal-weight index the same as any other company does.

When the S&P 500 outperforms its 500 equal-weighted index, it means that megacap companies are doing better than companies with smaller market caps. When the equal-weighted index outperforms, it means the megacap names are dragging down the index.

Since the start of 2023, megacap companies have drastically outperformed smaller S&P 500 names. Over the last decade, the S&P 500 rose 253.1% while the equal-weight jumped 161.6%. It would have been especially difficult for an individual investor to keep pace or outperform the S&P 500 during this period without significant exposure to megacap growth stocks.

Buying the S&P 500 for the right reasons

The biggest takeaway from these metrics is that the S&P 500 is expensive because a handful of growth stocks are driving its returns. But that doesn’t mean that all S&P 500 stocks are pricey. In fact, that’s hardly the case.

Many consumer discretionary and consumer staples companies have dirt cheap valuations due to pullbacks in spending. Even pockets of the tech sector are beaten down, namely in the application software industry, due to concerns of AI disruption for software-as-a-service business models.

Investors looking for stocks at a better value may not want to buy the S&P 500 at an all-time high. Or at least have it make up a smaller percentage of their portfolios. Whereas folks who believe that the Ten Titans will keep driving market gains may argue that the S&P 500 can grow into its lofty valuation because these companies are extremely well run, have tons of growth potential, high margins, and exceptional balance sheets.

In sum, the S&P 500 is no longer a balanced index, but rather a growth index. And that means investors should only consider buying it if its composition and valuation suit their risk tolerance.

You’re reading a free article with opinions that may differ
from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to
get instant access to our top analyst recommendations, in-depth research, investing resources,
and more. Learn More