Many stock market valuations are flashing that stocks are expensive.1
Investors should not ignore this, but did you know that this doesn’t necessitate stocks falling anytime soon?
Stock prices can go higher (and lower) than you think. Vanguard points out: “Valuations tend to be poor predictors of performance over the short or even intermediate term and should not serve as a primary reason for changing portfolio allocations.”2
One year returns from current P/E ratios are notoriously difficult to predict and widely scattered.
Additionally, if profits and earnings continue to go higher, stock prices can follow that trend upward.
The current rally does have some uneasy though. Eddy Elfenbein, a portfolio manager, wrote on Tuesday last week,
Over the last 20 trading sessions, the S&P 500 has closed lower only seven times. The market has gone 36 days in a row without a drop of more than 0.7%, which really isn’t a big drop. Since August 1, the market is up more than 6.7%, and since April 8, it’s up over 33%.
Don’t get me wrong — I’ll take it — but I understand that it’s not normal.3
Surprisingly, while many valuations are quite high and “bubble” talk has been floating around financial media lately, bullish sentiment is not that stretched, and there are still a lot of bears out there.
Bespoke Investment Group elaborates:
…sentiment was little changed based on the weekly survey from the American Association of Individual Investors (AAII). Bullish sentiment remained unchanged at 41.7% while bearish sentiment dropped to 39.2% and neutral sentiment increased to 19.1%. As shown in the chart below, even as stocks have recovered from their April lows, sentiment hasn’t experienced anywhere nearly as big a lift.4
Could a decent number of bears out there be a reason for further stock market gains? Maybe. Maybe not.
Sometimes choosing not to invest or making a dramatic move in your portfolio based on things like valuations or waiting for the next big drop can be more costly than being in the stock market.
One of the problems with waiting for a big dip (like what we already have had this very year) is that, as Charlie Bilello notes, “…historically only 20% of future Bear Markets brought prices below prevailing levels.”5
This is why market timing should not be the aim of the investor. The investor should be focused on how their existing portfolio (or new portfolio) is diversified appropriately within a risk tolerance they can handle to reach their financial goals.
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Sources:
- Chart taken from @Barchart via X on September 24, 2025. Accessed online: https://x.com/Barchart/status/1970997752529408344
- “Where to Find Value in US Markets”, July 23, 2025. Accessed online: https://corporate.vanguard.com/content/corporatesite/us/en/corp/vemo/how-stock-bond-valuations-changed.html
- CWS Market Review – September 23, 2025.
- “Morning Note - Three’s a Streak” on Thursday, September 25, 2025.
- Quotation and chart taken from his X account (@charliebilello) on September 24, 2025. Accessed online: https://x.com/charliebilello/status/1970874409054294459