The Short View By John Authers - This landmark actually matters. The S&P 500 has hit an all-time high for the first time since March 2000

The Short View By John Authers
Copyright The Financial Times Limited 2007
Published: May 22 2007 03:00 | Last updated: May 22 2007 03:00

This landmark actually matters. The S&P 500 has hit an all-time high for the first time since March 2000.

By far the world's most closely tracked index, its use in derivative contracts is widespread. Since 2000 the emergence of exchange traded funds has added to its importance: $64bn is held in the ETF that tracks the S&P 500 alone, in which 94.5m shares change hands each day.

There are technical complaints about Standard & Poor's methodology, which rests on the judgment of its committee. In recent years stocks like Google have had to wait long after becoming one of the biggest 500 US companies by market value before being included in the index. But the bottom line remains that - unlike the Dow Jones Industrial Average - when traders talk about "the US market" they mean the S&P 500.

Beyond its level, the S&P looks very different from its last peak seven years ago. Then, information technology made up 34.5 per cent of the index. It is now down to 15 per cent. Cisco Systems was the biggest stock, and traded at a multiple of 200 times earnings. Now, reassuringly, the biggest company in the S&P, ExxonMobil, is also the one that makes the most profits. The index trades at 18 times earnings; Cisco at 22.

Therefore, while irrational exuberance may have brought the S&P to its last peak, its return looks much more rational. Its multiple has remained unchanged over the last year, with prices driven by corporate earnings, which continue to grow at an annual rate of more than 8 per cent.

But celebrations should still be muted. The S&P has done nothing, in dollar terms, for seven years. In terms of gold it is down 57 per cent; in terms of euros, it is down 28 per cent. Since the last high, the MSCI emerging markets index has gained 95.6 per cent. Is this rationality catching up with the US, or irrationality reaching the rest of the world?