Is the U.S. stock market priced at a severe premium right now?
Many people use valuation data to claim there is a massive bubble in U.S. stocks. My view is the opposite: it’s definitely expensive, but not a full-blown bubble.
The Shiller CAPE is around 41. Historically, only the 2000 internet-bubble period was higher than today; the long-term mean is just 17.8. The Buffett indicator has broken 210%. Looking only at these two long-cycle benchmarks, the market is already in the extreme historical range.
But if you look at forward dynamic PE, the S&P 500 is roughly at 23x, and the Nasdaq 100 around 27x. This round of elevated premiums isn’t driven purely by sentiment. Over several consecutive quarters, the leading AI companies have delivered earnings. Institutional investors have raised their expected Nasdaq earnings growth for this year to nearly 38%, and the market is willing to pay for that certainty in growth.
The most important situation right now is that the rally is fractured.
The index’s high valuation is basically propped up by just six or seven top technology stock weightings. Many mid- and small-cap companies and traditional sectors are not priced excessively—this is a case where the index is expensive, but conditions inside it are uneven.
There’s also an unusual phenomenon in front of us: long-term bond yields have stayed at a high level. In theory, that should suppress the valuations of growth stocks. Yet this time, we’ve seen a coexistence of high interest rates and high valuations. This kind of setup is inherently fragile. As soon as AI earnings fail to meet expectations, or if interest rates rise again, the weighted stocks will quickly face valuation compression.
Here’s an easy pitfall: seeing valuations that look high and going all-in on short positions. Recall the passage in the book about the Great Short. After a bubble becomes expensive, it can remain so for a long time. It’s not hard to tell whether valuations are expensive. The hard part is enduring the market’s continued frenzy.
$NVDA.US
Many people use valuation data to claim there is a massive bubble in U.S. stocks. My view is the opposite: it’s definitely expensive, but not a full-blown bubble.
The Shiller CAPE is around 41. Historically, only the 2000 internet-bubble period was higher than today; the long-term mean is just 17.8. The Buffett indicator has broken 210%. Looking only at these two long-cycle benchmarks, the market is already in the extreme historical range.
But if you look at forward dynamic PE, the S&P 500 is roughly at 23x, and the Nasdaq 100 around 27x. This round of elevated premiums isn’t driven purely by sentiment. Over several consecutive quarters, the leading AI companies have delivered earnings. Institutional investors have raised their expected Nasdaq earnings growth for this year to nearly 38%, and the market is willing to pay for that certainty in growth.
The most important situation right now is that the rally is fractured.
The index’s high valuation is basically propped up by just six or seven top technology stock weightings. Many mid- and small-cap companies and traditional sectors are not priced excessively—this is a case where the index is expensive, but conditions inside it are uneven.
There’s also an unusual phenomenon in front of us: long-term bond yields have stayed at a high level. In theory, that should suppress the valuations of growth stocks. Yet this time, we’ve seen a coexistence of high interest rates and high valuations. This kind of setup is inherently fragile. As soon as AI earnings fail to meet expectations, or if interest rates rise again, the weighted stocks will quickly face valuation compression.
Here’s an easy pitfall: seeing valuations that look high and going all-in on short positions. Recall the passage in the book about the Great Short. After a bubble becomes expensive, it can remain so for a long time. It’s not hard to tell whether valuations are expensive. The hard part is enduring the market’s continued frenzy.
$NVDA.US