Are we in a stock market bubble? Only if it pops.
Article published: August 19, 2025
By: Wei Hu and Katie Klingensmith
The S&P 500, along with other stock market indices, keeps hitting new highs. As a result, we're getting the same question from clients:“Is this a bubble?”The trouble is, we only know the answerafterthe fact. Economic history shows that bubbles—periods of extreme overvaluation followed by sharp declines—are only labeled as such once they pop. The market going up and staying up – generally with fundamental reasons that make sense afterwards – is not the same thing as a bubble.
What History Tells Us
During the dot-com era, for example, the NASDAQ’s price-to-earnings (P/E) ratio soared above 150. By today’s standards, the overall market looks far more restrained, even though certain companies—such as some AI-focused firms—trade at lofty valuations. Palantir, for instance, posted a trailing P/E over 630 this year, and remains well above 500, which raises eyebrows. But does that mean the entire market is in bubble territory? Not necessarily.
What is a P/E Ratio? A Price-to-Earnings ratio is often cited to show if a company’s stock price is fairly valued relative to what that company is earning. A higher P/E ratio can indicate that investors are willing to pay more for each dollar of earnings, potentially suggesting the stock is overvalued, while a lower P/E ratio may suggest the stock is undervalued.
The difficulty lies in the fact thatvaluations alone don’t predict short- or medium-term market direction. A stock or sector can look expensive for years before any correction occurs. For example, in the early 1990s, tech stocks were already considered overvalued by some analysts—yet the boom continued for nearly a decade before collapsing in 2000. Additionally, we think that we are likely near the beginning of the AI story, and that there will continue to be major economic disruptions and changes in the way companies and people live. Some high valuations may actually be justified given the potential transformations from these technologies.
Source: Bloomberg. Earnings Per Share (EPS) reflects the consensus estimate for adjusted earnings per share. The consensus estimate is the mean of sell-side analyst estimates from November 30, 2001 through July 31, 2025.
Another challenge is that the signs of a bubble vary from episode to episode. The global financial crisis of 2008 was driven less by high stock valuations than by excessive leverage and risky mortgage securitization. By contrast, today’s leading growth stories—especially around artificial intelligence—don’t appear to be fueled by that kind of dangerous systemic debt. While companies like Meta are borrowing to fund AI buildouts, it’s generally for strategic financing reasons rather than survival.
Does Noise Inflate the Bubble?
Investor psychology complicates the picture. Rising markets stirgreed, encouraging some investors to chase momentum; falling markets provokefear, leading others to pull out prematurely. Headlines can fuel both impulses—one day warning of overvaluation, the next proclaiming there’s nothing to worry about. We are hearing both sentiments from our clients right now.
The reality is that markets will fall at some point, but no one can predict when. But history reminds us that the long-term direction of markets is upwards, even despite dire events like natural disasters, wars, and pandemics.
While some of our clients are very worried about a bubble collapsing, we have another set currently who want to buy at any dip, regardless of the cause. This new generation of investors, shaped by years of rising markets and low interest rates, seems immune to bubble-bursting fear. These clients may not have lived through – and been scarred by - the dot-com crash or the 2008 financial crisis. They have only been rewarded for holding through volatility. While this shift towards buying the dip could provide a cushion for all investors and limit the overall decline during falls in the equity markets, we also see through history that equity markets can have long periods of drawdowns. During these periods, it is especially important to hold an array of other assets. We strongly advise our clients to stay invested in such a diversified portfolio, including the equity investments right for their long-term plans, including during market downturns. It is extremely challenging to predict the bottom—and selling out of fear often means missing the rebound.
Key takeaways for investors
For long-term investors, the lesson is clear: chasing the assets with the highest recent returns or fleeing the market based on bubble fears is usually counterproductive. A thoughtfully diversified portfolio and a disciplined plan remain the best defenses against both speculative excess and sudden downturns—whether we’re in a bubble or not.
At ѨƵ, we help our clients recognize the emotional triggers—fear and greed—that can lead to costly mistakes. By focusing on long-term goals and evidence-based strategies, we guide investors to stay disciplined even when market narratives are pulling them in opposite directions.
This material was prepared for educational purposes only. Although the information has been gathered from sources believed to be reliable, we do not guarantee its accuracy or completeness.
An index is a portfolio of specific securities (such as the S&P 500, Dow Jones Industrial Average and Nasdaq composite), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index.
Past performance does not guarantee future results.
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