The Stock Market Is Looking a Bit Bubbly
Take a shot if you’ve heard this before: The stock market is overvalued right now. U.S. stocks have never been this expensive, and they’ve rarely moved this fast. Since the crash in March 2020, the S&P 500 has surged by about 160%. That kind of run is almost unheard of, and the rally has been capped by back-to-back annual gains of 20% or more in 2023 and 2024. Before now, that had only happened four times in history: two ended in bear markets; one barely eked out a 3% gain the third year; and only once — in 1997 — did the rally keep going.
As a result, valuations are stretching to keep pace with sentiment, but outpacing the fundamentals beneath them. The S&P 500 now trades at a record 3.35x sales (meaning investors are paying $3.35 for every $1 of revenue) and 22.5x forward earnings, a record and far above its long-term average. The market has also never been this top-heavy: The 10 largest companies make up nearly 40% of the index’s value, with most of them being trillion-dollar tech giants. Other signals are flashing red, too. The Buffett Indicator, which measures market cap relative to GDP, is at 217%, more than two standard deviations above trend — firmly in “strongly overvalued” territory, and CNN’s Fear & Greed Index has spent most of 2025 sitting in “greed.”
But it’s not universal; these ratios are a result of the S&P’s top-heavy companies' performance this year. For equally-weighted S&P 500 funds (like $RSP), the metrics are much more palatable, but the gains are also milder. Compare $SPY (the market cap-weighted S&P 500 index) with something like $RSP (which values all 500 companies equally), and you’ll find a return spread of ~6% — the top-heavy index wins there. Either way, history suggests expectations this extreme are tough to sustain. The question now is whether 2025 plays out like 1997 — or like the bubbles that came before it.
There’s a reason this might sound like a broken record: The U.S. stock market is almost always near an all-time high — it has to be in order to fulfill the investor and consumer expectation that “stocks always go up over time.” That we’re at a historic peak isn’t necessarily the concerning part — it’s more about the actual valuations of individual stocks and indices relative to actual growth. Is that something to worry about? Not necessarily, especially if you’re a long-term investor. But it is something to keep an eye on.
