The US stock market is running great. That’s why many investors fear it’s high.
Since early 2023, the benchmark S&P 500 has risen by more than 60%, reaching an all-time high despite headwinds ranging from President Donald Trump’s tariffs to concerns that artificial intelligence (AI) could be exaggerated.
For investors, explosive growth has been at a cost. With some measures, US stocks are more expensive than ever.
According to Gurufocus, investors who buy the S&P 500 last week are the highest price-to-selling ratio on record, at over $3.25 per dollar revenue generated by 500 constituents.
While US stocks look cheaper than corporate earnings forecasts, benchmark indexes still trade with advance revenues of more than 22 times, well above the historic average.
Last month, in a Bank of America poll, nine of the 10 fund managers surveyed said they believe US stocks are being overvalued.
A market sky valuation has led some analysts to draw comparisons to the dot-com bubble of the late 1990s.
Bringed by excitement over the rise of the internet, the technological Nasdaq stock rose by about 80% between 2000 and 2022 before giving up almost all of its profits.
“We’re looking forward to seeing you in a financial markets,” said James Angel, a financial market expert at Georgetown University’s McDonough School of Business.
“Only God knows what the future holds. Because of this uncertainty, stock prices are always very unstable and always very unstable. A small change in the market consensus estimate of future performance can lead to a large and sudden change in value.”
They remain unseparable despite investors expressing increasing concern about the price of US stocks.
The S&P 500 set five all-time highs in August alone, rising around 10% so far this year, and is on track to comfortably beat the average annual return in 2025.
Analysts provide various explanations of the unstoppable rise in the market, including the astounding profitability of the “magnificent 7” including Apple, Microsoft, Tesla, Meta, Amazon, Nvidia, Meta, Alphabet and more.
“The revenues of American companies are rising and growing surprisingly,” said Aswas Damodalan, a professor of finance at Stern School of Business at New York University.
“AI may have increased the value of several large tech companies and companies building AI architectures, but it cannot explain the overall increase in other parts of the market,” added Damodaran.
The market’s reliance on the “magnificent Seven” has been a source of concern for some investors, accounting for about a third of the S&P 500, but such concentration is not unprecedented.
Robert E Wright, a lecturer at the Faculty of Economics at the University of Central Michigan, said the dynamics of the few companies that dominate the market can be traced back to the late 18th century.
“Banks were the most important technology of the time, followed by real estate insurance companies,” Wright said.
“After textile mills and other manufacturers, then railways and eventually cars. Although they cannot be too accurate due to differences in the way capitalized measurements, the patterns look the same, but innovation leads to success.
Herd’s behavior
A more universal explanation is also provided for the great performance of the market, such as the transition from actively managed mutual funds to passive index funds.
The growing popularity of funds tracking the S&P 500 and other broad scales in the market means that more people buy stocks regardless of their economic situation than in the past.
However, the greater factor than any economic indicator could be human psychology.
Stephen Thomas, a professor at Bayes School of Business in the UK, said the herd’s actions provide a better explanation of stock market movements than corporate and economic conditions.
“The only trial and tested investment strategy for both international, cross-asset and historical support is “momentum.” So what goes up will continue to rise until it doesn’t,” Thomas said.
“Fund managers can’t afford to be left behind by their competitors,” added Thomas.
“And these use momentum explicitly or quietly. So they behave rationally from a solid perspective of action and in fact in terms of knowledge about investment strategies.”
A steep waterfall
There is no accurate way to predict stock market crashes.
However, steep waterfalls are a regular feature of the market.
Since the end of World War II, the market has declined more than 15 times since its peak.
In most of these cases the market rebounded to a peak within a few years, but the worst crash caused investors to red even longer.
Investors have not fully recovered their losses in nearly 13 years, suffering from dot-combust double wamy and a global financial crisis of 2008-09.
But if there is one virtually unanimous financial expert, it is a fool’s errand to spend time on the market.
“One of the reasons waiting to see the trends is so dangerous is that the best days on the market have followed right after the worst days,” Angel said.
“The highest year in US stock market history was the depths of Great Fear Presion in 1933. The market was so declining that it quickly recovered when it became clear that a recovery was ongoing.”
Burton Marquiel, a professor of economics at Princeton University, said investors who feel that risk tolerance is at the limits of risk, would rather hold more cash than trying to spend time on the market, such as bonds, balance the portfolio to low-risk assets.
“You’re always wrong, and in the long run, the US will ultimately straighten things,” he said.
