Markets at Record-Highs: Panic Signal or Normal Cycle?

Hi Reader,

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You have probably come across headlines like these lately:

• Is the S&P 500 overvalued?

• Markets at all-time highs - a crash is coming

The S&P 500 is a stock market index that measures the stock performance of 500 of the largest companies listed on stock exchanges in the United States. Because of its breadth and history, it’s often used as a proxy for the health of the U.S. stock market, and sometimes, the economy itself.

The chart below shows the performance of the index over the last five years:

It’s obvious that the index has been in a strong uptrend and is now trading at an all-time highs. This has sparked a familiar question in the investing world:

Is the market overvalued, and are we due for a correction or crash?

Much of the concern is driven by valuation metrics, particularly the Price-to-Earnings (P/E) ratio, and its smoother cousin, the Shiller CAPE ratio. In simple terms, the P/E ratio tells us how much investors are paying for each dollar of company’s earnings. If a company’s P/E rises from 15× to 30×, investors are paying twice as much for the same level of profits.

Historically, very high valuation multiples have preceded painful periods, most famously the Great Depression (1930s) and the Dot-com bubble (late 1990s)

This has led some professionals to argue that:

• Investing at high valuations leads to lower future returns

• Elevated valuations may signal heightened downside risk

While these concerns deserve to be acknowledged, they are only part of the picture.

What Matters More Than Headlines

There are a few important perspectives I think every long-term investor should keep in mind:

☑️ The S&P 500 Is Not the Same Index It Was Decades Ago. The S&P 500 is not static. Companies are regularly added and removed based on size, relevance, and market capitalization. The biggest companies today are very different from the biggest companies in 2005 and even more different from those in the 1980s or 1990s. (see below the top companies in the S&P 500 in 2005 Vs in 2025).

Two decades ago, the index was dominated by:

• Oil & gas

• Traditional banks

• Industrial conglomerates

Today, the index was dominated by:

• Technology, software, cloud, and AI-driven firms

• Businesses with global reach, high margins, and massive scalability

Many of today’s largest companies are more profitable, asset-light, and scalable than prior market leaders, which may justify structurally higher valuations than in the past. Comparing today’s index directly to earlier decades without accounting for this shift in composition is like comparing apples to oranges.

☑️ Concentration Is a Bigger Issue Than “Overvaluation” Technology and AI-linked companies now account for a very large share of the S&P 500, close to half, depending on how you define “tech.” This creates a concentration risk, not necessarily a reason to panic or sell everything. In other words, the index may rise or fall disproportionately based on a small group of mega-cap companies That’s a diversification issue, not automatically a valuation crisis.

☑️ Valuation Metrics Are Signals, Not Crystal Balls. No single metric (P/E, CAPE, or otherwise) can reliably predict when the market will peak or crash or how long high valuations will persist. Markets are complex and influenced by several factors - earnings growth, investor behaviour, innovation (e.g., AI) and other macroeconomic factors such as interest rates and capital flows amongst others.

History can inform us, but it cannot forecast the future with certainty. Even periods of extreme valuation have lasted much longer than most people expected.

So… What Am I Doing Personally?

Do I think the S&P 500 will rise forever in a straight line? No. Do I think it’s prudent to completely exit the index because of valuation fears? Also no. What does make sense to me is intentional diversification. Rather than abandoning the S&P 500, I’m increasingly allocating toward:

• Global equity indexes

• Broader U.S. market indexes (beyond just the top 500)

• Emerging market indexes, where valuations and growth drivers differ from the US

This isn’t about timing a crash, it’s about building resilience into a long-term portfolio. If you’re feeling uneasy about how dominant the S&P 500 has become in your investments, diversification (not panic) is often the more rational response.

If you’re interested, I’m happy to share the specific indexes I’m considering and why.

Reflect on This:

• If the market fell 20% tomorrow, would your decision to stay invested feel like a mistake or part of a long-term plan you believe in?

Till next week, I am rooting for you, money-ly!

Dee         

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Disclaimer: This does not constitute financial advice. Please conduct your research or consult your financial advisor for important financial advice.