The US stock market valuation has hit historic highs, with metrics like market-cap-to-GDP exceeding the Great Depression of 1929 and the dot-com crash in 2000. This has raised fears among investors that Wall Street is ripe for a deep correction.
Experts highlight that the US stock market’s current valuations appear frothy, largely driven by a small group of large tech companies that have delivered very strong earnings and, as a result, very strong stock price performance.
S&P 500 index has gained over 10 per cent this year so far, while tech-heavy Nasdaq has jumped 12 per cent.
What is driving the US stock market higher?
Strong investor sentiment around the emerging artificial intelligence (AI) theme has driven mega-cap tech stocks higher, pushing the US stock market to record highs and overall valuations to historic levels.
Subho Moulik, the founder and CEO of Appreciate, pointed out that a striking feature of this rally is its concentration. Just three companies, Microsoft, Apple, and Nvidia, now account for more than 20 per cent of the S&P 500’s value.
Expectations of a rate cut by the US Federal Reserve have also contributed to the market’s bullish sentiment.
“Monetary conditions have also played their part. Years of low rates and ample liquidity helped fuel asset prices, while lagging sectors like energy and industrials only reinforced tech’s dominance. Put simply, today’s bull market is as much about AI optimism as it is about the extraordinary weight of a few companies,” said Moulik.
Ross Maxwell, Global Strategy Lead at VT Markets, also observed that the latest US stock market highs due to strong growth in tech stocks and rate cut expectations.
“Record share buybacks and strong corporate earnings in sectors like cloud computing, semiconductors, and software have also helped push valuations higher,” Maxwell said.
In his speech at the Jackson Hole symposium on August 22, US Fed Chair Jerome Powell hinted at possible rate cuts in the coming months.
Ranju Rajan, the head of managed accounts at Axis Securities, underscored that though Powell’s tone was cautious about elevated inflation risk, the market interpreted it as dovish, raising expectations of a rate cut in the September 25 FOMC meeting. US 10-year bond yields have also seen some cooling off, fuelling sentiments in the US market.
US stock market valuations at historic highs?
At present, the US stock market valuations are at historic levels, raising concerns that a deep correction could be looming.
Experts highlight that the US equity markets are now trading at unprecedented valuations, extremely high by historical standards, rivalled only by famous bubbles.
“In fact, recent data show the market is in its most expensive phase in history, with metrics like market-cap-to-GDP exceeding levels last seen in 1999 and even 1929. In raw terms, the S&P 500 and Nasdaq Composite are well above their previous peaks, and the forward PE for the S&P 500 is roughly 23 times today, roughly 20–30 per cent above its decade norm,” said Moulik.
The Shiller PE (CAPE) ratio shows the US market valuation is at a level last seen at the peak of the dot‑com bubble in 1999.
Shiller P/E ratio, also known as the cyclically adjusted price-to-earnings ratio (CAPE ratio), is a valuation metric used to assess whether a stock market (or individual stock) is overvalued or undervalued based on its long-term earnings.
Moulik underscored that the Shiller PE (CAPE) ratio stood near 37–38 in mid‑2025, a level last seen at the peak of the dot‑com bubble in 1999. For context, in 1999, the CAPE hit about 44 before the crash.
Arindam Mandal, the head of global equities at Marcellus Investment Managers, also pointed out that on most measures, the US stock market is 20–30 per cent above its 10, 15 or 20-year averages. But this picture is heavily influenced by a small group of large growth companies that have delivered very strong earnings and, as a result, very strong stock price performance.
However, Mandal does not see US stock market valuations at alarming levels.
“Over the last three years, the market has been extremely bifurcated. A handful of stocks have done the heavy lifting while the rest of the market has struggled with higher interest costs and the unwinding of COVID-era excesses. In fact, if you look at the US midcap index or the equal-weighted S&P 500, valuations there are much closer to long-term averages, with barely any earnings growth,” said Mandal.
“That tells you a significant part of corporate America is closer to trough or at least normalised mid-cycle earnings rather than peak. For patient investors, this is where value is emerging,” Mandal said.
What should investors do?
Maxwell believes in the short term, momentum may keep markets elevated, especially if economic data remains resilient and earnings continue to surprise to the upside.
“This environment demands caution for investors. While staying invested in quality growth names has merit, there’s growing value in diversifying across sectors and geographically. Rotating some exposure into value stocks, holding cash reserves, and adopting hedging strategies can help manage risk,” said Maxwell.
Moulik suggests staying invested but with a disciplined, diversified approach, maintaining broad exposure rather than chasing single themes.
“Equity allocations can remain in place, but tilt toward quality and balance. For example, investors might modestly trim the absolute hottest names or sectors (where valuations look most stretched) and reallocate to defensive or value areas that have lagged (like value stocks or dividend stocks). holding gold and bond allocations can buffer volatility,” said Moulik.
Mandal said Marcellus’ positioning has leaned toward a barbell strategy: owning companies that are still delivering strong results today while also building exposure to those trading near cyclical lows.
Mandal said that while it cannot be predicted exactly when the turn comes, one encouraging sign is that real wage growth has been positive for more than two years now, after a decline for more than two years.
“That raises the odds of broader consumer spending picking up once some of the current uncertainties around trade and policy become clearer – not necessarily resolved,” said Mandal.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
