August 22, 2025 | The U.S. Stock Market is Riding High and Heading For Trouble

Riding High — and Heading for Trouble

The U.S. stock market keeps climbing higher, as the warnings of a bubble about to burst get louder. The comparisons to 1999–2000 are hard to ignore. Then, it was internet stocks; today, it’s artificial intelligence.

Valuations at Extremes

One of the best long-term measures of value, the Shiller Cyclically Adjusted Price/Earnings Ratio, is flashing red. In August it stood at 37.9 — higher than in 1929 and just shy of the record set during the dot-com boom. Robert Shiller’s measure smooths stock prices against a decade of earnings, and right now it points to one of the most expensive markets in history.

Source: Robert Shiller, Yale.edu

A Market Carried by a Few

Another troubling sign is how dependent this market is on a handful of names. The “Magnificent Seven” dominate, led by NVIDIA (8.1% of the S&P 500’s value), Microsoft (7.0%), Apple (6.3%), Amazon (4.0%) and Alphabet (4.0%). In 2000, only one stock — General Electric — made up more than 4%. The survival of today’s bull run rests almost entirely on these giants.

The Book Value Signal

By another yardstick, book value, the cycle is equally stretched. At the 1982 bottom, stocks traded just below book value. Historically, anything above 3.5 times was unusual. Today the multiple is 5.3, the highest premium in recent history for corporate assets in the stock market.

History’s Reminder

Past cycles show how this story usually ends. After 2000, the market lost half its value, with the biggest winners of the boom suffering even deeper losses. The same pattern appeared in 1929.

We can never know how or why the bull market will end, but traders are pinning their short-term hopes on several Federal Reserve rate cuts this year and the ongoing success of AI companies in 2026 and beyond. But what if the Fed keeps rates steady because the stock market’s mood is so ebullient? What if massive capital expenditures for AI don’t create the expected earnings?

The Question of Timing

What no one can predict is timing. The downturn could come next week, or the market could defy gravity for months or even years. But history shows that this kind of irrational exuberance does not last forever.

Hilliard MacBeth

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Hilliard MacBeth August 22nd, 2025

Posted In: Hilliard's Weekend Notebook

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