Steep Valuations Have Many Investors Feeling Uneasy
Nearly three decades ago, Federal Reserve Chair Alan Greenspan made one of the most historically memorable comments about market levels, when he wondered if “irrational exuberance” had taken hold. Greenspan ended up being right, but he was three years too early on his market call. An investor who had taken his warning to heart would have missed the outsized gains that characterized the late 1990s.1
Fast forward to today, and similar warnings are once again making the rounds.
The S&P 500 has climbed to fresh record highs this fall, and with it, so has a chorus of concern about valuations. Many are asking whether today’s artificial intelligence–driven rally is another episode of overexuberance, where investors are paying large premiums for the promise of future earnings. It’s a fair question.
The thread I want to pull here is to compare the market’s composition today with how it looked in 1999, when the tech bubble burst. Doing so shows that these two periods are not as alike as many might think.
Today, the largest U.S. companies are highly profitable, cash-rich, and deeply integrated into the global economy. They are not the speculative start-ups of 1999. As the chart below shows, the ten largest U.S. companies (nearly all Tech companies) now operate with an average return on equity of 29% and net profit margins of 34% (blue bars), both materially stronger than the levels seen during prior episodes of peak market concentration, and notably better than in 2000 when the tech bubble burst (gray bars).
Market concentration is a different concern, as today’s biggest companies account for a larger share of the S&P 500 than the “tech darlings” of the late 1990s ever did. Crucially, however, today’s weightings are supported by earnings power. The “Magnificent Seven” have an average forward P/E of 26.8x and a forward Enterprise Value (EV)/sales multiple of 6.1x. Compare that to 52x forward earnings and an 8.2x EV/sales ratio for the biggest Technology companies in 2000.
In short, valuations today may be elevated in absolute terms, but they’re far more grounded in cash flow, scale, and real economic contribution than they were in the past. Tech earnings, as shown in the chart below, underscore this point. Excluding the Tech sector contribution, Zacks estimates that Q3 earnings for the rest of the S&P 500 index would be up only +2.7% (vs. +5.5% otherwise).
Earnings elsewhere in the market are also being revised higher, in a sign of optimism among business executives. But I want to be clear that should earnings weaken, perhaps due to slower global growth, rising costs, or a pullback in capital spending, lofty valuations could magnify downside moves. Investors should keep a close eye on corporate profits and margins, because those will determine whether valuations stay “fair” or become stretched. These fundamentals are great now, but that could change.
Bottom Line for Investors
High valuations often attract attention, but they rarely offer useful forecasts. Consider the various forms of price-to-earnings ratios—trailing, forward, and cyclically adjusted (CAPE). Each tries to gauge how expensive the market is, yet none has proven reliable in signaling future returns.
Trailing P/Es rely on past profits that markets already absorbed months ago. Forward P/Es rely on estimates, some better than others. And CAPE, while theoretically designed to smooth earnings over time, has been above its “long-term average” for most of the last 15 years, during which stocks have produced some of their strongest returns in history.
From my vantage, valuations today are high, but they’re not irrational given the supporting structure of strong earnings growth. They reflect a market underpinned by solid balance sheets and durable business models. Could that change if profits falter? Absolutely, and that’s worth monitoring.
Disclosure
2 Goldman Sachs. 2025.
3 Zacks.com. October 3, 2025. https://www.zacks.com/commentary/2761906/a-closer-look-at-the-evolving-earnings-picture
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