In a world where economic uncertainties loom large—from trade tariffs to AI hype—the US stock market continues to defy gravity. The S&P 500 has shattered records, climbing over 60% since early 2023, yet whispers of a potential crash grow louder. What makes this rally feel so “abnormal”? Is it a bubble waiting to burst, or a new normal driven by innovation and investor psychology?
The Abnormal Valuation Metrics:
One of the most striking abnormalities in US stock market is its sky-high pricing. Investors are paying a premium like never before. For instance, the price-to-sales ratio for the S&P 500 hit a record $3.25 for every $1 in company revenues last week—higher than any point in history. Even when measured against future earnings, the index trades at over 22 times forward profits, far exceeding long-term averages.
This isn’t just numbers on a screen; it’s a red flag for many. A Bank of America survey revealed that 90% of fund managers see US stocks as overvalued. Comparisons to the late 1990s dot-com bubble are inevitable, where tech excitement drove the Nasdaq up 80% before a brutal crash wiped out gains over two decades. So, why the abnormality? Experts point to uncertainty in valuing future earnings—small shifts in market sentiment can trigger massive swings, making the current highs feel precarious.
Tech Giants and AI: The Magnificent Seven’s Outsized Influence
At the heart of this abnormal market dynamic lies the “Magnificent Seven”—Apple, Microsoft, Tesla, Meta, Amazon, Nvidia, and Alphabet. These tech behemoths account for about one-third of the S&P 500’s weight, driving much of the index’s gains through stellar profitability and AI potential. Nvidia’s chips, for example, are powering the AI revolution, boosting valuations even as broader economic concerns persist.
But is this concentration abnormal? Not entirely—history shows similar patterns. Back in the 18th century, banks and insurers dominated markets during their innovative eras, much like railroads and automobiles later. Today, AI represents the next frontier, explaining why earnings at US companies remain robust despite headwinds like tariffs. As finance professor Aswath Damodaran notes, while AI hype elevates a few stocks, it doesn’t fully account for the market-wide rise. This tech-heavy skew creates an illusion of broad strength, masking vulnerabilities in other sectors.
Herd Mentality and Passive Investing:
Beyond fundamentals, human behavior amplifies the market’s abnormality. “Herd behavior” is a key culprit—investors chase rising stocks to avoid missing out, perpetuating the upward momentum. Professor Stephen Thomas from Bayes Business School emphasizes that momentum investing (buying what’s going up) outperforms other strategies historically. Fund managers, fearing underperformance against peers, pile in, creating a self-fulfilling prophecy.
Adding to this is the shift toward passive index funds. Unlike active managers who pick stocks based on conditions, these funds buy the market indiscriminately, injecting billions regardless of valuations. This passive influx has supercharged the rally, making the market less reactive to economic signals. The result? An abnormal resilience, with the S&P 500 notching five all-time highs in August and a 10% year-to-date gain, on pace to outstrip its historical average in 2025.
Crashes Are Normal, But Timing Them Isn’t
Stock market crashes aren’t rare—they’re part of the cycle. Since World War II, the market has plunged 20% or more 15 times, with recoveries varying from quick bounces to prolonged slumps like the 13-year hangover from the dot-com bust and 2008 financial crisis. What’s abnormal now is the sustained ascent amid warnings, reminiscent of past bubbles fueled by hype.
Yet, experts like Georgetown’s James Angel warn against panic: “Stock prices are volatile because they’re tied to unpredictable futures.” Princeton’s Burton Malkiel advises rebalancing portfolios toward bonds or cash for risk-averse investors, rather than trying to time the market—a strategy that’s notoriously futile. Some of the best market days follow the worst, as seen in 1933’s record year amid the Great Depression.
What Should Investors Do ?
Navigating this unusual landscape requires caution without overreaction. Here’s a quick guide:
- Diversify Beyond Tech: Reduce reliance on the Magnificent Seven by spreading into undervalued sectors.
- Monitor Key Indicators: Watch price-to-earnings ratios and fund manager sentiment for signs of shifts.
- Embrace Long-Term Thinking: History favors staying invested; the US economy has a knack for recovery.
- Avoid Timing Traps: As Angel puts it, missing a few big up days can devastate returns.
In summary, the US stock market’s abnormal behavior stems from a potent mix of tech innovation, psychological momentum, and structural shifts in investing. While overvaluation fears are valid, they’re not a guaranteed crash signal. By understanding these drivers, investors can position themselves wisely in this high-stakes environment
