By Ian Salisbury
Investors worried the stock market is overvalued can protect themselves by staying away from names whose price-to-earnings ratios have ratcheted sharply upwards in the past few months.
It isn't hard to find candidates. The S&P 500 has nearly doubled over the past three years, partly because of all the excitement over artificial intelligence's potential to reshape the economy.
In a note Monday, Trivariate Research said it analyzed the 900 largest U.S. stocks by market value to find those that traded at more than 40 times their earnings per share for the first time in recent history in 2025. It identified 22 names, some that have been in the news in recent weeks, such as Circle Internet Group, Broadcom, and Oracle. All of those have crossed the threshold of 40 times since September.
Other technology names that have hit the mark since then include Tower Semiconductor, MACOM Technology Solutions, Ciena Corp., SailPoint, and Pure Storage. There are two industrials on the list: Curtiss-Wright and Karman Holdings.
Historical data suggests investors should be wary of these stocks. Going back to 2003, stocks whose P/E ratio moved above 40 times ended up lagging behind the market by 12 percentage points on average over the next three years, after adjusting for volatility, Trivariate found.
Some of the stocks on the list are already showing signs of trouble. Broadcom, a chip maker, is up nearly 50% year to date and crossed the 40-times threshold in late November, according to Trivariate. Earlier this month, Broadcom stock suffered its worst three-day stretch in five years, plunging 18%, despite reporting better-than-expected fiscal fourth-quarter earnings.
Investors appear to have been on hair trigger. The shares had been turbocharged by optimism surrounding Broadcom's AI chip business, but the market got spooked when CEO Hock Tan noted the business's low gross margins.
Now, Broadcom is trading at around 34 times the earnings expected for 2026, suggesting some of the pain may be behind it.
Circle Internet Group is another Icarus-like stock to watch. The company, which issues the USDC stablecoin, a type of cryptocurrency pegged to the U.S. dollar, had one of the year's hottest initial public offerings in June. But after trading as high $263 in its first few days on the market, shares recently changed hands at about $88.
Like Broadcom, Circle has found it hard to please investors who seem to be demanding the moon. In mid-November, the company reported third-quarter profits that were more than three times what Wall Street was looking for. Investors still found something to worry about: Circle's IPO lockup period ended around the same time, leading to fear insiders would begin flooding the market with shares.
The stock is down about 10% in the weeks since. It currently trades at 89 times estimated 2026 earnings, according to FactSet.
Write to Ian Salisbury at ian.salisbury@barrons.com
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(END) Dow Jones Newswires
December 22, 2025 14:20 ET (19:20 GMT)
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