September 16, 2025 | Stock Owners Have Learned To Love The Bomb

Since 1950, the S&P 500 index has averaged a 5-year annualized earnings growth rate of 7%. Today, S&P 500 pricing assumes a forward 5-year annualized earnings growth rate of 15% (Rosenberg Research).

Leveraging this extraordinary optimism, the S&P 500 is trading at more than 23x 5-year forward earnings expectations, some 28% above the longer-term historical average of 18x, and 38x its Shiller CAPE (10-year Cyclically Adjusted Price-Earnings), more than 120% above CAPE’s 17x long-term average.

Indeed, on all 8 of the most historically reliable valuation measures (Trailing P/E, Forward P/E, CAPE, price to book, price to sales, EV/EBITDA, Q Ratio, and Market Cap to GDP), the stock market today is the most richly valued since at least 1900, and comparable only to the infamous bubbles of 1999, 1965 and 1929 (see red circles).

Although the economy and income growth are stumbling on most fronts, hope springs eternal that Artificial Intelligence (AI) spending will overcome all problems.

The top ten most expensive S&P 500 companies (9 of which are tech cos, as shown below) make up over 39% of the market cap (this was less than 30% at the last tech bubble peak in March 2000), while the top 5 most expensive (all tech cos) make up 27% (this was 12% in the 1965 secular market peak).

Historic concentration in one sector (tech) means that stock investors are exposed to more single stock/single sector risk today than ever before. Some rare and vital perspective is offered in The Market’s Riskier Than It Used to Be—and Investors Love It:

Investors have a strange relationship with risk. On the one hand, they want it: Risk brings reward when it works out. On the other hand, unrewarded risk is the very last thing anyone wants.

The result is the all-too-familiar swing between fear and greed, boom and bust, as investors switch from loving risk to fleeing it. This is relevant to today’s stock market because the market is riskier than it used to be on three important metrics:

First, it is much more concentrated in a handful of stocks than in modern times. That means investors who simply track the market are taking much more single-stock risk than in the past.
Second, the stocks that dominate the market are heavily exposed to one big bet, on generative artificial intelligence, into which they are expected to pour almost $400 billion this year.
And third, everyone agrees that those stocks are phenomenal and bound to go up, creating a form of groupthink vulnerable to a sudden reverse on any setbacks.

“So like around March I could feel it coming. I just—I had to play. I couldn’t help myself. And three times the same week I pick up a—don’t do it. Don’t do it. Anyway, I pick up the phone finally. I think I missed the top by an hour. I bought $6 billion worth of tech stocks, and in six weeks I had left Soros and I had lost $3 billion in that one play. You asked me what I learned. I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself. So, maybe I learned not to do it again, but I already knew that.”

Danielle Park September 16th, 2025

Posted In: Juggling Dynamite

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