Markets might feel unstoppable, but it’s important not to get complacent.
“There’s definitely some level of froth [in markets],” Fed Watch Advisors founder Ben Emons told Yahoo Finance Executive Editor Brian Sozzi on his Opening Bid podcast (see video above or listen here). “There’s a lot of liquidity in the market. You see speculation through these meme stocks — so that’s happening.”
Emons suggests investors use this moment to reduce concentration risk in your portfolio, or take some profits in a stock that has surged this year and as a result is weighted too heavily.
The S&P 500 hit 35 record closing highs on Monday. From a trailing price-to-earnings (PE) ratio perspective, the S&P 500 is trading at 28 times compared to a historical mean of about 15 times.
The “Buffett Indicator” as it’s called in Wall Street circles — which takes the Wilshire 5000 Index (viewed as the total stock market) and divides it by the annual U.S. GDP — is now at a record high.
Warren Buffett’s favorite indicator stands at about 196.2% — up sharply from 137% or so from September 2022 lows.
The figure is well above the 159.2% seen just before the dot-com bubble.
Meanwhile, shares of Apple (AAPL) have gained a cool 30% since April, allowing it to take back the mantle as world’s most valuable company ($3.55 trillion market cap) from chip beast Nvidia (NVDA) ($3.15 trillion market cap).
Microsoft (MSFT), Apple, Alphabet (GOOG, GOOGL), Amazon (AMZN), and Meta (META) are all trading at record high valuations. The top 10 companies in the S&P 500 make up 35% of the market cap but only 23% of earnings, according to data from Apollo (the parent company of Yahoo Finance) chief economist Torsten Slok.
Seemingly everywhere one looks, the market is beginning to feel too hot, given the near-term risks such as a contentious presidential election cycle. The outlook for interest rate policy from the Fed also remains uncertain, and corporate earnings are only seen rising by a single-digit percentage in the second quarter.
Pros are beginning to line up on the other side of the trade amid those risks, and are calling for a swift and steep pullback.
Morgan Stanley’s top strategist Mike Wilson warned this week of a 10% pullback in stocks ahead of the election. Wilson is among the experts on the worried about current stock valuations.
And Nvidia’s stock caught a rare downgrade to neutral by New Street Research on valuation concerns.
While there is no proverbial crystal ball on markets or individual stocks, Freedom Capital Markets chief global strategist Jay Woods said on Opening Bid that 10% pullbacks happen once a year on average.
“We had a 14% pullback last year,” reminded Woods.
Three times each week, Yahoo Finance Executive Editor Brian Sozzi fields insight-filled, market-focused conversations and chats with the biggest names in business on Opening Bid. Find more episodes on our video hub. Watch on your preferred streaming service. Or listen and subscribe on Apple Podcasts, Spotify, or wherever you find your favorite podcasts.
In the below Opening Bid episode, Warren Buffett’s son Howard G. Buffett shares some investing tips passed down to him from his father.
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