Valuation Gaps Widen: Case for Active Management

One of the more prominent themes in today’s equity markets is the unusually wide valuation gap. The top 20% most expensive companies in the S&P 500 Index trade at a price-to-earnings ratio (P/E) of just over 28x, while the bottom quintile trades near 12x—marking a wider valuation gap than the historical norm. As for international equities, the pattern is similar, with the highest valued quintile of the MSCI EAFE Index trading just over 24x versus the cheapest trading near 11x.¹

The overall valuation backdrop in the US remains stretched relative to its long-term average. As of late October, the S&P 500’s forward P/E stood at 23x, compared to its 20-year average of roughly 16x and 30-year average of 17x.² While these multiples have eased somewhat earlier in the year, they remain well above their historic norms. This could be a reflection of the heavy influence of mega-cap technology companies, which continue to drive much of the index’s performance and contribute to the perception of US stocks as being overly expensive. That being said, international markets appear much closer to fair value and can benefit from supportive tailwinds, such as moderating inflation trends and a weaker U.S. dollar shown earlier in the year.

For investors seeking diversification, the wide gap between expensive and relatively cheap names supports the case for selectivity—and for global exposure in regions where valuation spreads may offer greater upside potential. Active managers with a focus on quality can be well positioned to navigate this uneven landscape and possibly capitalize on the global market’s persistent inefficiencies.

Valuation Dispersion Remains Wide, Suggesting a Benefit to Selectivity
Comparison of S&P 500 Index (top) and MSCI EAFE Index Valuation Dispersion (bottom) 80^th Percentile Versus 20^th Percentile P/Es
October 2004 through October 2025  

 Source: FactSet, as of October 31, 2025.