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“The market can stay irrational longer than you can stay solvent.” — John Maynard Keynes
By many common valuation measures, the stock market looks rich. The Buffett Indicator—total U.S. market value divided by GDP—stood at about 217% in June 2025, roughly 69% above its long-term average. Other metrics point to similar excesses, and taken together they suggest the market may be 69% to 126% overvalued depending on which measure you use.
Analysts watch long-run indicators like price/earnings and price/sales ratios. When these deviate substantially above historical norms, the market is often described as “overvalued.” The Shiller CAPE ratio, which smooths earnings by averaging inflation-adjusted profits over the past decade, is one widely respected example. Price-to-sales compares current market value to trailing 12-month sales. Each measure offers a different view, but all aim to judge whether prices are supported by fundamentals.
Historically, the Shiller CAPE has exceeded today’s level only rarely—most notably in October 1999, when it peaked before the dot-com collapse. That episode saw the S&P 500 fall sharply over the following decade. Still, a high valuation doesn’t guarantee an imminent crash. Markets tend to revert toward their long-term averages, but predicting when that will happen is extremely difficult.
Some argue that structural changes—such as substantial productivity gains from new technologies—could support higher valuations if corporate earnings grow enough to justify current prices. Others point out that today’s leading companies are generally more profitable and established than many of the speculative firms that dominated the late-1990s boom.
Because markets fluctuate, selling in a downturn can punish investors who must also guess when to get back in. Timing the market is risky; a more reliable approach is to choose a sensible investment plan and stick with it. Also avoid putting money into the market that you’ll need within the next five to seven years, since shorter time frames can be volatile.
Diversification remains essential. Different asset classes lead in different years, so spreading risk helps smooth returns over time. If you’re uneasy about current stock valuations, consider strategies that emphasize capital preservation and income: higher-yield cash holdings, bonds or bond funds for income and principal protection, and real-estate debt investments that pay interest as loans are repaid. For investors who still want equities but with some defensive tilt, dividend-focused approaches—such as buying higher-yielding, established companies or using dividend-oriented funds—can be worth exploring.
In short, high aggregate valuations often precede corrections, but they can persist. Rather than trying to predict a crash, focus on a durable plan aligned with your goals and risk tolerance: diversify, favor assets that match your time horizon, and keep a long-term perspective so you’re prepared for volatility and ready to take advantage of opportunities when valuations normalize.
