The S&P 500 surged 85%, but experts warn of a possible repeat of the 2000 internet bubble?

Over the past three years, the S&P 500 index has achieved an astonishing return of 85%, currently riding on strong momentum, yet its valuation levels today mirror those of the internet era, raising concerns among Wall Street analysts about its long-term return potential. According to experts, the expected price-to-earnings ratio for the S&P 500 index tracked by the Vanguard S&P 500 ETF (NYSE: VOO) is about 23 times, meaning that investors are paying a price that is 23 times the expected earnings for the next 12 months. Will the high valuation lead to reduced future returns? The following analysis is purely market observation and not any investment advice.

What should investors be worried about as valuations soar to new highs?

The S&P 500 in the US stock market delivered an impressive 85% return, demonstrating resilience and growth potential. However, as the upward trend continues, valuations have also risen sharply, leading many market observers to worry whether the current US stock market is entering a high-risk zone similar to the internet bubble of 2000. According to the latest data, the expected price-to-earnings ratio (P/E Ratio) of the Vanguard S&P 500 ETF, which tracks the S&P 500 index, is about 23 times, indicating that investors are willing to pay 23 times the expected earnings for the next 12 months. Experts believe that this scenario resembles the peak of the 2000 bubble, and the market subsequently experienced extremely lackluster performance over the following decade.

Does high valuation mean low returns?

Is stock market valuation closely related to future return rates? Benzinga analysis suggests that historical data provides a clear warning: when the expected price-to-earnings ratio of the S&P 500 exceeds 22 times, the annualized return over the next decade tends to hover between -3% and 3%. When the price-to-earnings ratio exceeds 24 times, history has shown that it has never resulted in positive returns over a ten-year period. In contrast, when the price-to-earnings ratio is low (for example, below 12 or 13 times), the S&P 500's annualized returns often achieve double-digit growth, averaging an increase of 12% to 16% per year. Brandon Rakszawski, Managing Director of Product Management at VanEck, pointed out in a report that excessively high valuations and overexposure to risk “could weigh down long-term return potential,” reminding investors to be aware of this phenomenon. He believes that investors are willing to pay such high price-to-earnings ratios because many companies, especially the “seven giants,” have achieved significant profit growth recently. The last time such valuation levels occurred was in 2000, followed by a decade of lower returns, although the financial crisis of 2008-2009 had a profound impact on it.

The seven tech giants boost stock prices, and the market is overly concentrated.

Experts believe that the current strong performance of the market is largely driven by a few tech giants, particularly the “Seven Giants” that have performed exceptionally well in the field of artificial intelligence, including NVIDIA, Microsoft, Apple, Alphabet, Amazon, Meta, and Tesla. These companies have driven stock prices up with their strong profit performance, causing their market capitalization to continue rising in proportion to the index. By 2025, the top ten companies in the S&P 500 will account for 40% of the overall weight, far exceeding the 27% at the peak of the dot-com bubble in 2000. This extreme concentration is unprecedented. Rakszawski warns investors that the market is now overly reliant on a few tech giants and suggests careful consideration of asset allocation to avoid excessive exposure to a single industry or corporate group.

It's not a bubble, it's a “super concentrated market”?

Despite the ongoing heat in the market, some experts believe that the current risks may be more complex. Jordi Visser, head of AI Macro Nexus research at 22V Research, pointed out that the current market is not a traditional bubble but a “super concentrated market mechanism” dominated by a few winners. Visser emphasized that this structural concentration is closely related to the growing wealth gap. According to data, the wealthiest 1% of households in the U.S. own about one-third of the national assets, while the poorest 50% own only 2.5%. Visser stated that bubbles do not necessarily manifest in price increases but rather in the huge disparities between rises and falls. He believes that this “super concentrated market mechanism,” although stable in the short term, is more susceptible to violent reactions to sudden events. Artificial intelligence may continue to drive the rise of top stocks, but it has also led to significant performance divergence. Given that the current market value and corporate profits are dominated by tech giants, the risk lies not only in prices but also in concentration. The upward trend is still ongoing. However, historical data shows that the higher the valuation, the more difficult it is to maintain long-term excellent performance.

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