The S&P 500 Index (SPX) has surged to record highs over the past two years, fueled by strong economic growth. However, investors are increasingly concerned that some market gains have outpaced fundamental valuation metrics.
Despite trade tensions and DeepSeek’s challenge to the AI boom, market enthusiasm remains high. Meme stocks are resurging, options trading is booming, and Bitcoin is trading around $100,000. This heightened speculation is making some traders uneasy, as excessive risk-taking can destabilize markets and sometimes precede sharp corrections.
"Signs of a bubble have been present for some time," said Seema Shah, Chief Global Strategist at Principal Asset Management. "The market is highly vulnerable to disappointment."
One major concern is that retail investors are overly optimistic about a handful of high-growth companies.
Palantir (PLTR), a U.S. data software giant specializing in AI and data analytics, has become a retail investor favorite. After reporting strong sales growth and increased demand for its AI products, Palantir’s stock surged 24% on February 4. The stock has gained about 58% this year and was one of last year’s top-performing stocks in the S&P 500.
Traders are also pushing up shares of Strategy (formerly MicroStrategy, MSTR). The company has essentially become a Bitcoin investment vehicle, with its market capitalization reaching $87 billion, nearly twice the value of its Bitcoin holdings.
Meme stocks are experiencing a strong comeback. According to FactSet, shares of GameStop (GME), BlackBerry (BB), and online pet retailer Chewy (CHWY) have all skyrocketed over 90% in the past 12 months.
Meanwhile, options trading activity has hit record highs. Options are a popular investment tool for traders looking for higher returns beyond traditional buy-and-hold strategies, but these bets can quickly unravel.
According to OCC (Options Clearing Corporation), an average of 58 million options contracts were traded daily in January—the highest monthly figure since records began in 1973. 2024 has already seen record-breaking options trading volume.
Data from Cboe Global Markets shows that on January 31, zero-day options (0DTE) tied to the S&P 500 Index reached a historic trading volume. These contracts, expiring within a single day, are among the riskiest speculative instruments, allowing investors to bet on intraday market movements.
Investors are also venturing beyond traditional stocks and bonds into cryptocurrency markets and prediction markets.
Since some traders placed large bets on Donald Trump's election victory, prediction markets—where users wager on real-world events—have grown in popularity. These markets offer contracts on everything from Federal Reserve meetings to Los Angeles wildfires and even criminal investigations like that of Luigi Mangione, a suspect in the murder of Brian Thompson.
Meanwhile, sports betting platforms like DraftKings and FanDuel remain popular, and crypto traders are piling back into the volatile cryptocurrency market.
Bitcoin (BTC) remains one of the most sought-after trades. Optimism that a Trump administration could usher in a "golden era" for crypto has driven Bitcoin to an all-time high of $109,000 in January.
According to Morningstar Direct, since Election Day, investors have poured nearly $17 billion into spot Bitcoin ETFs listed in the U.S.
Meme coins—digital assets with no inherent economic value, often based on internet memes—have also surged.
According to CoinMarketCap, the Trump (TRUMP)andMelaniaTrump(TRUMP) and Melania Trump (TRUMP)andMelaniaTrump(MELANIA) tokens, launched in January, peaked at 15billionand15 billion and 15billionand2 billion in market capitalization, respectively.
Overall, stock market valuations appear stretched.
According to FactSet, the S&P 500’s forward 12-month price-to-earnings (P/E) ratio is 22x, exceeding its 10-year average of 19x and approaching the 26x level seen before the 2000 dot-com crash.
While high valuations don’t necessarily indicate an imminent sell-off, they can limit long-term returns and make earnings growth even more critical for stock performance.
This year’s market rally has been supported by strong corporate earnings. So far this earnings season, S&P 500 companies have reported 16.7% profit growth.
However, some analysts warn that rising interest rates could dampen these profits.
Last week, Federal Reserve Chair Jerome Powell reiterated that the Fed is in no rush to cut interest rates, following a January CPI report showing the highest monthly inflation increase since August 2023.
"People still believe the Fed is in an easing cycle," said Roger Aliaga-Díaz, Global Head of Portfolio Construction at Vanguard. "But if inflation starts rising again and disrupts this process, it could send a shock through the market."
When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.
Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
