There Hasn't Been an Era When U.S. Stocks Were This Expensive Since the Dot-com Boom

By some measures, U.S. large-cap stocks are currently trading at historically high premiums relative to key fundamentals like sales and profits—levels not seen since the dot-com era.

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Following the initial market surge after President Donald Trump’s electoral victory, investor sentiment appears to be shifting, with many becoming more focused on concerns about elevated valuations, according to recent market surveys.

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The primary worry is that stretched valuations could lead to a market correction, something that some analysts believe is long overdue.

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The S&P Global Investment Manager Index, which tracks professional investors’ market outlook, indicated that their risk appetite in February dropped to one of the lowest levels recorded since the survey began in October 2020. Respondents identified stock valuations as the top factor that could weigh on near-term market returns.

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Chris Williamson, executive director at S&P Global Market Intelligence, noted that investor sentiment toward U.S. equities has turned significantly more risk-averse, marking one of the most cautious periods seen in the last five years.

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Similarly, a recent survey from Bank of America Global Research pointed to growing concerns about valuations. Data shared with MarketWatch on Tuesday revealed that 89% of fund managers surveyed viewed U.S. stocks as overvalued—the highest percentage recorded since at least April 2001.

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Retail investors appear to share similar worries. A survey from the American Association of Individual Investors conducted last week showed that over 47% of respondents expected stocks to decline in the next six months, marking the highest level of bearish sentiment since late 2023.

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Back then, the stock market was just starting to recover from a sharp correction, during which the S&P 500 fell 10% between early August and the end of October 2023.

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Despite these concerns, high valuations alone do not guarantee that stocks are on the verge of a downturn. The most inflated valuations are primarily found in U.S. large-cap stocks, while small- and mid-cap stocks remain more reasonably priced. The same applies to foreign markets, according to Bill Merz, head of capital markets research at U.S. Bank Asset Management Group.

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Although Wall Street’s expectations for 2025 corporate earnings growth have dipped since the start of the year, large-cap fundamentals still appear solid. Fourth-quarter earnings reports suggest that corporate profit margins, revenue, and earnings growth remain robust.

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"Fundamentals for U.S. stocks remain extremely strong," Merz told MarketWatch.

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Despite positive earnings data, concerns over high valuations persist, particularly as the S&P 500’s rally has lost momentum since mid-December.

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The index reached a new record close on Tuesday, marking its first since shortly after Trump’s inauguration. Meanwhile, the Nasdaq-100 hit its first record high of the year last Friday.

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One key measure, the cyclically adjusted price-to-earnings (CAPE) ratio, developed by Nobel Prize-winning economist Robert Shiller, stood at 38.5 as of Friday’s market close—the highest since late 2021, according to Dow Jones Market Data. Before 2021, the last time the CAPE ratio was this high was in late 2000. This ratio compares stock prices to their average inflation-adjusted earnings over the past decade.

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Another valuation measure, the forward price-to-sales ratio for the S&P 500, stood at 3.03 as of Friday—matching levels last seen during the summer of 2000. Additionally, the index’s forward price-to-earnings ratio stood at 22, surpassing its 10-year average of 19 times expected earnings.

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While historical data suggests that high valuations alone do not predict near-term stock movements, research from Wall Street banks indicates that when valuations are significantly above historical norms, long-term returns tend to be lower.

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Some analysts believe these stretched valuations leave stocks vulnerable to negative developments, particularly given the uncertainty surrounding Federal Reserve policy and Trump’s economic agenda.

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Other macroeconomic concerns are also weighing on investor sentiment. Consumer inflation expectations have risen in recent weeks, while Fed Chair Jerome Powell has signaled that the central bank is in no rush to cut interest rates after keeping borrowing costs unchanged in January.

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“The market is priced for perfection, and instead of one major looming concern, there’s a slow accumulation of factors that make investors feel like things can’t get any better,” said Brian Allen, chief investment officer at CS McKee, in an interview with MarketWatch. “People are just a little off-balance.”

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Beyond earnings and sentiment surveys, other key market indicators present a mixed picture.

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U.S. equity mutual funds and ETFs recorded their first weekly outflows of 2025 last week, according to EPFR data. At the same time, gold prices have surged to record

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highs near $3,000 an ounce—possibly reflecting investor unease about high levels of U.S. government debt, according to Merz.

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Despite valuation concerns, many investors remain hesitant to move to the sidelines.

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The latest BofA fund manager survey revealed that, while many believe U.S. stocks are overvalued, the percentage of cash holdings in their portfolios has fallen to its lowest level since 2010. This suggests that investors remain heavily invested in equities.

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Options traders have also remained bullish. The 20-day rolling average of the Cboe Equity put-call ratio stood at 0.53 on Friday—the lowest since July 2023—indicating strong demand for call options relative to put options. Trading volume in options reached a new monthly record in January, according to Cboe Global Markets and the Options Clearing Corporation.

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Merz noted that despite various risks, the resilience of stocks—such as their ability to recover quickly from the DeepSeek selloff late last month—suggests the ongoing bull market that began in late 2022 still has room to run.

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“Looking at the sheer number of concerning headlines over the past 18 months, there have been plenty,” Merz said. “But history has shown that these concerns don’t always translate into actionable investment strategies.”

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In a notable shift, the rally in the S&P 500 and Nasdaq Composite is no longer solely dependent on a few mega-cap stocks like Nvidia, which were responsible for an outsized share of gains in 2023 and 2024.

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With a broader range of stocks participating in the market’s rise, investor confidence in the sustainability of the bull market could strengthen.

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That being said, conditions could still change. However, large-cap U.S. stocks have been trading at elevated valuations for a while now, yet the market has continued to climb.

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