As the end of the year approaches, investment minds naturally turn to the question: Have we had a good year? For most, especially those in the US, the answer is, yes. With the S&P 500 (up 26% year to date at the time of writing) and other stock indexes at record highs, plus Bitcoin hitting USD 100,000 there is some concern amongst investors of bubbles developing, particularly in the US where investor exuberance is on full display. In this QB, we’ll have a brief look at some of the factors giving rise to concern and attempt to place them in a wider context. That said, no one can be certain when or if a bubble is present, or when it is likely to pop.
Cyclically adjusted PEs are just one way to measure stock valuations.

Source: Shiller, Wall Street Journal
Looking at cyclically adjusted earnings (CAPE) is one method of attempting to even out short-term earnings performance, thereby creating a longer-term and more sustainable trend. But often it is the shorter-term trends over a year or two that drive market performance, so adjusting for the business cycle limits the value for market timers. Nevertheless, with the CAPE at 37x, one gets a sense of where markets are at.
Trailing versus forward earnings
The chart below uses more conventional price-to-earnings (P/E) measures, showing trailing and forecast earnings. Note that trailing P/Es for the S&P 500 index are presently at 27x, and forward P/Es at 22x. The difference between the two suggests that there is a decent amount of earnings growth anticipated in the next year.

Source: Yardeni Research
What has happened to P/Es over the last 2 years?
Recession fears caused investors to slash the forward P/E for the S&P 500 from 21x at the start of 2022 to 15.3x on 12 October 2022 (the low, and when this bull market started). Bear markets tend to bottom with forward P/Es lower than 15x, but probably this one bottomed at a relatively high forward P/E because investors started to anticipate that recession fears were overstated, and correctly judged that the US economy was remarkably resilient in the face of the tightening of monetary policy.
From a P/E of 15.3x on 12 October 2022, the forward P/E had rebounded to 22.3x by the end of November 2024. That increase in the S&P 500’s valuation multiple was bolstered by a 15% increase in the forward earnings per share (EPS). The result has been a solid bull market.
Ed Yardeni Research points out the growth in corporate earning
(the red line is consensus forward EPS)

Source: Yardeni Research
The key driver of forward P/Es is investors’ perception of how much and for how long earnings will grow before the next recession depresses earnings and valuation multiples. Economic growth drives earnings growth, and investor expectations for both drive the forward P/E.
One of the most powerful narratives driving Wall Street has been the power and growth of the Magnificent 7, the mega-cap Tech and AI-related stocks, which are priced for global domination of AI. These giant companies (Nvidia, Apple, Meta, Alphabet, Amazon, Microsoft, Tesla) make up a third of the S&P 500’s market cap, and they have accounted for 65% of the index’s 26% gain so far this year, according to the Bank of America.

Source: LSEG, Wall Street Journal
Since Trump’s election victory, markets have surged and rated US Inc. and US equities even higher than they were to start with. Ruchir Sharma wrote in the Financial Times, “relative prices of stock in the US are the highest since data began over a century ago…The US accounts for nearly 70% of the leading global stock index, up from 30% in the 1980s”.
“The idea of America as an exceptional nation, superior to its rivals and therefore destined to lead the world, seems passé to most observers. In political, diplomatic, and military circles, the talk is of a dysfunctional superpower, isolationist abroad and polarised at home. But in the investing world, the term “American exceptionalism” is hotter than ever.
United by faith in the strength of US financial markets and their capacity to keep outperforming all other economies, global investors are committing more capital to a single country than ever before in modern history. The US stock market now floats above the rest. Relative prices are the highest since data began over a century ago and relative valuations are at a peak since data began half a century ago.” – Ruchir Sharma, FT.

Source: LSEG, Wall Street Journal
The US has been the world’s fastest-growing developed economy since the pandemic and its productivity has grown consistently faster than any comparable economy over the past two decades. But these trends will not last forever.

Source: Atlanta Federal Reserve
“The overwhelming consensus is that the gap between the US and the world is justified by the earnings power of top US companies, their global reach, and their leading role in tech innovation. These strengths are all real. But one definition of a bubble is a good idea that has gone too far. America is over-owned, overvalued, and overhyped to a degree never seen before” – Ruchir Sharma, FT.

Source: CEIC Data
The US market performance is attracting capital from across the globe, adding to upward pressure on the USD. The strong greenback will in turn sooner or later impact exports and earnings derived from offshore (approximately 40% of S&P 500 EPS). These trends tend to auto-correct once they become too stretched.
As the old market hands used to say to me when I started as a junior trader back in 1986 on the Johannesburg Stock Exchange, “Trees don’t grow to the sky”. In October of 1987, I found out what that meant.
We’ll end with a final chart that suggests that once bull markets become entrenched and are older than 2 years, they tend to have great longevity. While I hope that’s correct, the truth is nobody knows.

Source: Carson Investment Research