The fears are understandable. The index has soared, regardless of considerable economic and policy risks. The S&P 500, now a bit below 6000, is well above its level just before April 2, when President Donald Trump announced 10% tariffs on all imports, plus higher levies on many of the U.S.’s most important trading partners.

Tariffs are still a danger, even though the president has suspended most of the country-specific levies until July 9. Investors are monitoring whether potential price increases from companies will bring more inflation, higher interest rates, and slowing economic growth. The Trump administration’s tax and spending bill, as approved by the House of Representatives, would mean an even larger federal budget deficit, which could both add to inflation and send bond yields higher.

Those concerns, for now, are on the back burner. Inflation has remained close enough to the Federal Reserve’s 2% target for the market to bet that the central bank may cut interest rates this year, fueling expectations that the economy and corporate earnings will continue to grow. As a result, traders and investors have bid the S&P 500 upwards, leaving naysayers in the dust.

Now, the index appears expensive at about 22 times the aggregate per-share earnings that analysts forecast for the coming 12 months, according to FactSet. That is close to the highest multiple in the past 3½ years, a period when rates have risen and growth has slowed a bit.

As a result, the view that the market is vulnerable to sliding in response to any economic disappointment has become more widespread. But the most fundamental analysis of companies indicates that as long as the economy avoids major trouble, the S&P 500 is mildly undervalued.

Dennis DeBusschere, veteran strategist and founder of 22V Research, did the work. He assumes S&P 500 earnings will grow at 8% annually for the next five years, a standard forecast period for valuing stocks. That call looks reasonable, or even conservative, because it is three percentage points below the consensus call among analysts tracked by FactSet.

That type of growth is nothing investors can’t imagine. The economy is still expanding, and profits for Big Tech, which account for a double-digit percentage of earnings for the index, are expected to grow just over 15% annually for the next two years, partly as a result of increasing demand for artificial intelligence.

For the long term, beyond the next five years, he assumes a constant growth rate of 4%, which means earnings would increase slightly faster than growth in gross domestic product, at 2.8% in 2024. That too is reasonable, given Big Tech’s presence in the index.

The cash companies return to shareholders via dividends and stock repurchases should grow at roughly the same pace, assuming companies maintain the percentage of their earnings they pay out to stockholders. DeBusschere discounts the current value of those future cash flows by about 8%—four percentage points more than the roughly 4% yield he expects on safe 10-year Treasury debt—arriving at a value of 6170 for the S&P 500.

If it traded at that level now, it would be valued at 23 times the next 12 months’ earnings. At a glance, that looks too expensive, but it makes sense.

Maybe the market really is worth that much. Big Tech’s AI adventure is just beginning, and if the economy avoids recession, earnings will grow at companies in other sectors, too.

That is a big “if,” and the pessimists are afraid that earnings will disappoint. But if they don’t, the S&P 500 isn’t actually that expensive.

It might even be underpriced.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com