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The Stock Market Makes No Sense
The S&P 500 keeps moving higher despite geopolitical conflict, rising gas prices, high living costs, and constant warnings that we’re repeating 1929, Japan’s 1980s bubble, or the Dotcom crash. The scary part is that charts can make today look eerily similar to past melt-ups, where prices exploded right before everything collapsed. Japan’s market rose more than 22% per year from 1970 to 1989 before falling 50%, while Dotcom tech stocks crashed roughly 78% from the peak.
Why This Might Be A Bubble
The strongest bubble argument is that stocks are historically expensive. The S&P 500’s forward P/E is above 28, far higher than the long-term average near 17, meaning either earnings need to surge or prices may eventually fall. The top 10 stocks now make up about 40% of the S&P 500, concentration is beyond Dotcom levels, and the Buffett Indicator is flashing extreme overvaluation. Add in declining birth rates, rising social spending, more debt, lower savings, and an aging population, and critics argue the economy is being artificially supported by cheap money and government spending.
Why This Time Could Be Different
The counterargument is that today’s biggest companies are not empty Dotcom names. They generate enormous profits, have strong cash flows, and are still growing. The Magnificent 7, including Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla, continue to dominate because they are genuinely strong businesses. Cloud spending, AI infrastructure, semiconductor demand, and sovereign AI investment are all creating real earnings power behind the rally. Unlike 2001, where companies traded at extreme multiples with little profit, today’s average P/E is closer to 28 versus roughly 65 at the Dotcom peak.
The Market Needs A Catalyst To Crash
High valuations alone do not automatically end bull markets. Historically, crashes usually need a catalyst that turns confidence into forced selling. Right now, earnings remain strong, cash flows are healthy, and forward earnings are still below the 2001 peak. Smaller companies are also beginning to participate, which could make the rally broader and more durable. That does not mean risk is gone, but it does mean “expensive” can stay expensive for longer than most people expect.
The AI Bubble Warning Signs
Fidelity’s key warning signs are shrinking free cash flow from aggressive AI spending, companies owning too much of each other’s stock, worsening leverage ratios from debt-fueled expansion, AI growth getting capped by power and computing bottlenecks, and wider credit spreads that make borrowing more expensive. If those signals start flashing together, it would suggest investors are getting too far ahead of reality. Until then, Fidelity’s view is that AI could continue pushing markets higher as more industries use it to scale.
The Cash Problem
One reason investors keep buying is simple: the alternative is not attractive. Over long periods, cash has barely kept up, and over the last 20 years it has actually lost purchasing power after inflation. So investors face a tradeoff: accept a guaranteed long-term loss in cash, or accept short-term volatility in stocks for the chance to capture long-term upside.
The Realistic Takeaway
The market is expensive, but it may not yet be a full-blown Japan-style bubble. For that comparison to really work, earnings would need to stall and the S&P 500 would need to move 2x-3x higher. The smarter takeaway is not to panic, but to be cautious: keep steady income, diversify, hold enough cash, maintain a long time horizon, and avoid betting everything on one outcome. If the market falls, it becomes a buying opportunity. If it keeps rising, staying invested prevents missing the upside.
What I’m Doing
The lesson is simple: the market can stay irrational longer than you can stay solvent. The better strategy is diversification across U.S. and international index funds, holding cash and tax-free muni bonds, and continuing to dollar-cost average into low-cost index funds regardless of the headlines.
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*Some of the links and other products that appear on this video are from companies which Graham Stephan will earn an affiliate commission or referral bonus. Graham Stephan is part of an affiliate network and receives compensation for sending traffic to partner sites. The content in this video is accurate as of the posting date. Some of the offers mentioned may no longer be available. This is not investment advice.
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