Summary of Key Points
This article primarily analyzes the current valuation status of the U.S. stock market and whether the bull market has reached its peak: The valuation of the U.S. stock market has reached a new high since 1929 (the total market value of the S&P 500 accounts for 212% of GDP), exhibiting similarities to the bubbles during the internet boom in the 1990s and the electrification revolution in the 1920s. However, based on historical patterns and three key indicators (corporate profits, credit spreads, and implied volatility), it suggests that the U.S. stock market may not have reached its peak yet. Future gains are likely to be more volatile, and investors should be alert to changes in these signals.
I. U.S. Stock Market Valuation: At a Century-High Level, Resembling Major Historical Bubbles
Let’s get a sense of just how “expensive” the U.S. stock market is:
- Total Market Value/GDP Ratio: It has soared from 41% in 2009 (when the market bottomed out) to 212% today, the highest level since the Great Depression of 1929. In simple terms, the size of the U.S. stock market is more than twice the annual economic output of the United States. There have only been two other similar periods in history: the internet revolution in the 1990s (driven by technological advancements) and the electrification and assembly line adoption in the 1920s (led by industrial revolutions).
- Other Valuation Indicators: The price-to-earnings ratio, price-to-book ratio, and price-to-sales ratio are all at historical highs. More importantly, stock prices are significantly disconnected from actual corporate dividends (cash earnings) and the present value of future earnings—meaning that the “dream part” of the valuation far exceeds what can actually be realized.
- Driving Factors: This time, the main driver is the artificial intelligence revolution, similar to the internet boom, where expectations for future growth are so high that valuations have been pushed to unprecedented levels.
II. Historical Patterns of Bull Market Peaks: Few Peaks in the Middle, More at the End
The article examines historical bull markets (1929, 2000, 2008) and identifies an interesting pattern:
- A “Mid-Cycle Curse” of Ten Years: Almost no bull market has peaked in the middle of a ten-year cycle (for example, 2025 is the middle of the 2020-2030 cycle). Peaks usually occur at the end of the cycle (e.g., 2000 was at the end of the 1990s cycle, and 2008 was at the end of the 2000s cycle), with occasional occurrences at the beginning.
- Why? Investors tend to make linear extrapolations—seeing a positive trend in the middle of the cycle, they assume it will continue indefinitely until they realize, near the end of the cycle, that valuations might be too high. For instance, during the 2000 internet bubble, everyone thought the internet would change everything, only to discover later that many companies were unprofitable and the bubble burst.
III. Three Key Indicators for Identifying a Peak: How Many Are Currently Redosing?
The article highlights three warning signs:
1. Corporate Profits: Before a bull market peaks, corporate profits typically start to decline.
- Historical Examples: Before the 2000 bubble, the proportion of corporate profits to GDP peaked in 1997 and then continued to fall; before 2008, profits peaked in 2006, and the stock market crashed a year later.
- Current Situation: Corporate profits are still growing, and profit forecasts have even accelerated in recent months, indicating that we haven’t reached the stage of declining profits for now, so it’s relatively safe.
2. Credit Spreads: The difference in interest rates between high-risk bonds (issued by troubled companies) and government bonds. These spreads widen before a peak (indicating increased risk of default).
- Historical Examples: Before 2000 and 2008, the interest rates on high-risk bonds were much higher than those on government bonds.
- Current Situation: Spreads are still at historical lows and have not widened, meaning companies can borrow at low costs, and the market believes the risk of default is low.
3. **Implied Volatility (VIX): This reflects market expectations of future volatility. Before a peak, VIX tends to increase in both magnitude and frequency.
- Historical Examples: VIX began to rise before 2000 and 2007.
- Current Situation: VIX has started to rise slightly since hitting a low in 2024, but additional signals (such as widening credit spreads or declining profits) are needed for confirmation. Currently, it’s just a “yellow light,” not a “red light.”
IV. How Far Is the U.S. Stock Market from a Peak? Possibly Early, but the Road Ahead Will Be Turbulent
Overall:
- Reasons Why It’s Not Yet a Peak: Corporate profits are growing, and credit spreads have not widened (two key indicators are still healthy). Although valuations are high, the market is still “believing in the future” (e.g., growth driven by AI).
- Points to Watch: The rise in VIX indicates that future gains will be more volatile—there may be significant corrections (e.g., a 3% drop in one day), but a crash is not expected for now.
- Special Situation: Rapid growth in corporate profit forecasts has even caused the “forward price-to-earnings ratio” (based on future profits) to decline, which is different from previous peak periods when valuations were rising. Therefore, historical experiences cannot be directly applied.
In summary, the U.S. stock market is like a car traveling at high speed; although the “speedometer” (valuation) is showing extremely high numbers, the “engine” (corporate profits) is still running strong, and the “braking system” (credit spreads) has not signaled a problem. However, the “vibration” (volatility) is increasing, suggesting a bumpy ride ahead. Investors should secure their positions, avoid panic, but also avoid being overly greedy.
V. A Note on Private Credit and Consumer Debt
The article also mentions a potential concern: Although the spreads on high-yield bonds have not widened, the private credit market (non-public loans) is under pressure, with increasing default rates on credit cards and car loans. This indicates risks in certain sectors that have not yet affected core stock market indicators. It’s like a minor cold that hasn’t developed into a severe illness, but it’s important to monitor whether the situation will spread.
In conclusion, the U.S. stock market is in a state of high valuation with some support, and the bull market may continue for a while. However, future gains will test investors’ patience and risk tolerance more significantly.