Stock Market Continues to Defy Gravity: Experts Recalibrate Normal as Valuations Reach Record Highs
The S&P 500 index continues to trade near record highs, with valuations approaching levels last seen during the dot-com bubble. This surge in stock prices has led experts to rethink what constitutes normal for today’s market. Bank of America equity strategist Savita Subramanian is one such expert who believes that mean reversion may not be necessary, as multiples can be expected to remain elevated.
According to a client note sent by Subramanian on Wednesday, "Perhaps we should anchor to today’s multiples as the new normal rather than expecting mean reversion to a bygone era." This shift in thinking reflects a broader recalibration across Wall Street, driven by accelerating artificial intelligence adoption and resilient earnings growth. Strategists are now considering valuations not only in terms of historical averages but also against current market conditions.
Sam Stovall, chief investment strategist at CFRA Research, told Yahoo Finance that while valuations remain elevated compared to long-term averages, they look more justifiable when measured against the past five years — a stretch marked by megacap leadership and strong fundamentals. "Over the past 20 years, the S&P 500 is trading at roughly a 40% premium to its long-term average on forward estimates," he said. "But on a five-year basis, when mega-cap tech began to dominate market cap and earnings growth, that premium shrinks to a high single-digit range."
In other words, what looks expensive through a decades-long lens may be far more justified in today’s tech-driven market structure. This recalibration is essential as investors reassess their expectations for market performance.
Rise of Tech Sector Alters Market Landscape
The debate over valuations has also spilled beyond Wall Street research desks and into the broader investor community. Fed Chair Jerome Powell acknowledged this past week that markets look "fairly highly valued," a comment that drew comparisons to former Fed Chair Alan Greenspan’s 1996 "irrational exuberance" speech, which was delivered more than three years before the dot-com bubble actually burst.
Sonali Basak, chief investment strategist at iCapital, pointed out the parallels between the current market and the 1999 surge in stock prices. In a LinkedIn post on Friday, she shared a warning from Barry Ritholtz, chief investment officer at Ritholtz Wealth Management, who cautioned that trying to time the top can be a costly mistake.
Basak noted that, after Greenspan’s famous warning, "the market ended up rallying for years." Ritholtz reminded investors that those who stayed on the sidelines missed a fivefold rally in the Nasdaq before the eventual crash. This historical lesson is shaping today’s narrative as strategists weigh high multiples against still-solid growth and robust earnings.
Changing Market Dynamics Challenge Conventional Wisdom
"There’s something weird going on with valuations from what they used to be — that is, there’s an upward trend in the valuation range," said Jim Paulsen, who now writes a Substack newsletter called Paulsen Perspectives. Market veteran Ed Yardeni wrote in a note on Tuesday that while today’s valuations are lofty — the S&P 500’s forward price-to-earnings ratio sits near 22.8, just below the 25.0 peak before the 1999 tech bust — corporate earnings have largely kept pace with prices.
Case in point: During the late-1990s bubble, Technology (XLK) and Communication Services (XLC) stocks made up roughly 40% of the S&P 500’s market cap but contributed just 23% of earnings. Today, those sectors represent a record 44% of market value and deliver 37% of the index’s earnings.
The strategist also pointed to rising forward earnings and revenues, with Q3 results tracking toward another record high. Others on Wall Street agree that while valuations appear stretched, the current setup doesn’t signal a bubble.
Despite High Valuations, Investors Remain Optimistic
Gene Goldman, chief investment officer at Cetera Financial Group, told Yahoo Finance that "2025 has been phenomenal," and strong GDP growth, resilient consumer spending, and extra cash sitting on the sidelines are key supports for equities. He emphasized that "we don’t see a bear market because you need a recession to have a bear market." The economy looks pretty good."
According to Goldman, the bigger risk may be a "melt-up" — not a meltdown — as investors chase performance into year-end. Stocks could remain elevated due to earnings expectations for 2026 remaining strong and Fed rate cuts continuing to broaden market participation.
Conclusion
The current market continues to defy historical norms, with valuations reaching record highs. Experts are reconsidering traditional assumptions about mean reversion, now focusing on adjusting multiples with the changing market dynamics. As investors grapple with these challenges, they must remain flexible, recognizing that what looks expensive today may be justified in the context of shifting economic and technological trends.
Ultimately, while valuations are soaring, the narrative among experts remains optimistic. They stress that corporate earnings are solid, contributing to price increases as markets navigate unprecedented levels of technological disruption and artificial intelligence adoption.
