With $818 billion in assets, the Vanguard S&P 500 ETF (VOO +0.08%) is the largest exchange-traded fund there is. Its combination of broad U.S. equity market coverage, a razor-thin expense ratio, and strong historical performance has helped make it a cornerstone of many investment portfolios.
Whether now is a good time to invest in the fund, however, is a subjective question. You could look at corporate earnings, stock valuations, or simply what's in favor at the moment to help guide your decision-making. It's an imperfect science, but examining the current state of the market and the economy can also help mitigate your risk of buying at a top.
With the S&P 500 trading near its all-time high, let's take a look at a few factors to consider in assessing whether this is a good time to invest in the Vanguard S&P 500 ETF.
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Corporate earnings have looked good
In the end, financial performance is what's going to drive stock prices over the long term. For the S&P 500 companies generally, the trend is still looking positive. For the third quarter (and with 95% of companies reporting), earnings have grown more than 13% year-over-year. That makes it the fourth consecutive quarter of double-digit percentage earnings growth.
Earnings growth doesn't guarantee further gains in the S&P 500, but it does provide a nice backdrop. The S&P 500's earnings contracted during the financial crisis, the COVID pandemic, the 2022 bear market, and the bursting of the dot-com bubble. It doesn't appear we're headed in that direction just now.
NYSEMKT: VOO
Key Data Points
The Fed is expected to cut interest rates further
According to the CME's FedWatch tool, the market is currently pricing in the expectation for roughly three more quarter-point rate cuts to the federal funds rate by the end of 2026.
Falling interest rates are often a tailwind for stocks because they loosen financial conditions and reduce the cost of debt financing. Lower rates are also a positive for consumers because they can improve people's ability to spend money.
The market's expectations on the Fed's course of action from here will naturally change over time as we receive updated inflation, economic growth, and labor market readings. For now, however, this is supportive for stocks.
The S&P 500 is historically expensive
Thanks in part to the AI boom and the tech rally, the S&P 500's performance has been strong since the beginning of 2023. However, that has also made stocks expensive relative to the earnings they've generated. The trailing 12-month price/earnings (P/E) ratio for the index now is about 30. That's well above its long-term average of 16.
This doesn't necessarily mean a correction is imminent. Stocks can trade at higher multiples for extended periods if earnings growth and low interest rates are there to support them. But it does make them more vulnerable to a downturn should macro conditions shift.
Can AI help keep pushing stock prices higher?
A lot of tech companies are spending big money to build out artificial intelligence (AI) infrastructure. Investors have been betting that rising use of AI systems will drive efficiency and productivity gains, translating to stronger earnings and revenue growth in the future.
If AI keeps developing and demonstrates that it can improve profitability, optimism about the technology could keep investors in a positive mood.
A cautiously optimistic outlook
There are a number of factors supporting the case for further gains in the S&P 500. The financial performance of S&P 500 components overall still looks positive, and the likelihood that the Fed will keep cutting interest rates over the next 12 months is providing an additional tailwind.
There are some risks, though. The labor market is showing signs of slowing, and the index is trading at historically expensive levels. That doesn't necessarily signal that a correction is coming, but that backdrop could contribute to a steeper-than-average pullback if macroeconomic conditions go south.
While conditions will certainly continue to evolve, this still looks like a good time to buy the Vanguard S&P 500 ETF.
