The US stock market has been performing exceptionally well, many investors assuming it is overpriced.
The benchmark S&, P 500 has increased by more than 60% since early 2023, surpassing all previous highs, despite concerns about US President Donald Trump’s tariffs and concerns about artificial intelligence (AI) overhype.
The explosive growth has a price for investors: according to some, US stocks are now more expensive than ever.
According to GuruFocus, the highest price-to-sales ratio on record, an investor buying into the S&, P 500 last week had to pay over $3.25 for every $1 in revenue generated by its 500 constituent firms.
The benchmark index is still trading at more than 22 times forward earnings, which is significantly higher than the historical average, even though US stocks appear less expensive in relation to company profits forecasts.
Nine out of ten fund managers surveyed by Bank of America said they thought US stocks were overvalued in a poll conducted last month.
Some analysts have drawn comparisons to the late 1990s dotcom bubble due to the market’s sky-high market value.
Shares of the tech-heavy Nasdaq rose by about 80% before losing almost all of their gains between 2000 and 2022 as a result of the excitement surrounding the growth of the Internet.
No one is certain what a stock really is worth, according to James Angel, a McDonough School of Business expert on financial markets at Georgetown University.
Only God is able to predict the future. Stock prices have always been and will always be very volatile as a result of this uncertainty. A small change in the market’s general consensus forecast of future performance can cause a significant and unexpected decline in value.
Investors are not renouncing their reservations about the value of US stocks, despite the fact that they are becoming more and more concerned about the price of the stocks.
The S&, P 500, which is on track to comfortably surpass its average annual return in 2025, reached five all-time highs in August alone and is now up about 10% this year.
Analysts have provided a number of explanations for the market’s untamed ascent, including the remarkable profitability of the “Magnificent Seven”: Apple, Microsoft, Tesla, Meta, Amazon, Nvidia, Meta, and Alphabet, as well as the still untapped potential of AI.
Aswath Damodaran, a professor of finance at New York University’s Stern School of Business, noted that “earnings at US companies have held up surprisingly well and continue to grow.”
“AI may have increased the value of a few of the major tech companies and those who create AI architecture,” Damodaran continued, but it cannot explain the market’s overall rise.
Some investors have been concerned about the “Magnificent Seven,” who make up about one-third of the S&, P 500, but such concentration is not unprecedented.
The market dynamics of a few companies can be traced back to the late 18th century, according to Robert E. Wright, a lecturer in the Department of Economics at Central Michigan University.
According to Wright, “property insurers were the most important technology at the time,” followed by banks.
“Later, textile mills and other companies were established, railroads and, inevitably, automobiles. The measurement of capitalization is different, so we can’t be too precise, but the pattern seems to be the same: innovations lead to success, investment, and more success until commodification. The cycle then starts over in a different field.
Herd behavior
The market’s stellar performance, as well as the recent shift away from actively managed mutual funds to passive index funds, have prosaic explanations been provided.
More people are buying stocks now than ever thanks to the increased popularity of funds that monitor the , S&, P500, and other broad market measures.
Human psychology, however, could be a bigger factor than any other economic indicator.
Herd behavior, according to Stephen Thomas, a professor at the UK’s Bayes Business School, is more accurate for explaining stock market movements than business performance or the state of the economy.
The only proven investment strategy with both historical support and cross-account support is “momentum,” which means that what goes up continues to rise until it doesn’t, according to Thomas.
According to Thomas, “Fund managers can’t afford to fall behind their competitors.”
“And these are using momentum either secretly or deliberately. They behave therefore in a rational manner in terms of firm behavior and, in fact, in terms of our understanding of investment strategies.
Steep falls
A stock market crash cannot be accurately predicted.
However, the market frequently exhibits steep falls.
The market has fallen 20 percent or more from its peak 15 times since World War II’s end.
In the majority of those cases, the market recovered to its peak within a few years, but the worst crashes kept investors in the red for a long time.
For nearly 13 years, investors who were hit by the dot-com bust and the global financial crisis of 2008-2009 struggled to fully recover their losses.
However, if there is one thing that practically everyone agrees on, it is that trying to time the market.
According to Angel, “waiting to see a trend is so dangerous is the result of some of the best uptrends occurring soon after the worst downtrends occur.”
1933, when the Great Depression was at the height of the stock market, was the “best year in US stock market history.” When it became clear that a recovery was in progress, the market quickly rallied because the market had already fallen so much.
Investors who feel they are within their risk tolerance, according to Burton Malkiel, a professor of economics at Princeton University, should shift the balance of their portfolios towards lower-risk assets, such as bonds, and hold onto more cash rather than attempt to time the market.
Source: Aljazeera
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