Are US Stock Markets Overvalued? Fed, AI Hype, and Looming Risks – Azat TV

Fed Chair Powell’s Six Words: A Rare Warning Hits Wall Street

In a year marked by record highs and relentless optimism, US stock markets have become the stage for a drama that’s as old as Wall Street itself. The S&P 500, Dow Jones, and Nasdaq have all notched up dozens of new peaks, driven by excitement over technologies like artificial intelligence and quantum computing. Yet, as investors cheer the rally, a single phrase from Federal Reserve Chair Jerome Powell—“equity prices are fairly highly valued”—has cast a shadow over the exuberance. Reuters and The Motley Fool note that it’s been nearly three decades since a Fed chair addressed equity valuations so directly, echoing Alan Greenspan’s famous 1996 “irrational exuberance” speech that preceded the dot-com bust.

Powell’s blunt assessment isn’t just rhetoric. It’s rooted in a slew of historical data points suggesting that US equities are not just expensive—they’re in territory rarely seen before. The Shiller price-to-earnings (P/E) ratio for the S&P 500, a gauge that smooths out short-term shocks by averaging inflation-adjusted earnings over a decade, hit 40.23 in October 2025. That’s the second-highest reading in over 150 years, and history shows that every time this ratio stayed above 30 for more than two months, it was followed by market declines ranging from 20% to a staggering 89%.

Valuation Metrics Signal Bubble Territory

It’s not just the Shiller P/E ratio sounding alarms. The “Warren Buffett Indicator”—the market-cap-to-GDP ratio—has soared to an unprecedented 221%, dwarfing its 55-year average of 85%. Warren Buffett himself has been a net seller of stocks for years, underscoring his view that the market is frothy. Meanwhile, the S&P 500’s price-to-sales (P/S) and price-to-book ratios are both at or above levels last seen during the dot-com bubble, further fueling concerns about unsustainable valuations. Barchart and Charlie Bilello have highlighted how these metrics show stocks trading at massive premiums to historical norms.

Much of the recent surge has centered on the so-called “magnificent seven”—Nvidia, Microsoft, Apple, Alphabet, Amazon, Meta, and Tesla. Together, these tech giants have amassed a combined market value of nearly $21 trillion, surpassing the entire output of the European Union. This concentration raises the stakes: if optimism over AI and tech falters, the ripple effects could be profound.

AI Optimism and the Solow Paradox: Promise vs. Productivity

Artificial intelligence has captured the imagination of investors, promising to revolutionize everything from business operations to daily life. Yet, as Nobel laureate Robert Solow observed about computers decades ago, transformative technology doesn’t always translate into immediate productivity gains. The so-called “Solow Paradox” is now resurfacing in debates about AI. While the future potential is undeniable, real-world gains are taking longer to materialize than the stock market appears to anticipate. Indian Express reports that much of the rally in AI stocks is driven by capital chasing future promise, not current profits.

In Silicon Valley, whispers of overvaluation and “financial engineering” abound. Circular deals—such as OpenAI pledging billions to buy chips from AMD, which in turn offers OpenAI a stake—are emblematic of the exuberance. Investors, gripped by FOMO (fear of missing out), continue to pour money into these stocks, even as analysts warn that the underlying fundamentals may not justify the valuations.

Global Risks: Debt, Policy, and the Specter of a Crash

Beneath the surface, serious risks are building. The US faces threats from mounting government debt, policy uncertainty, and the potential for inflation to spike if trade tensions escalate. International voices are growing louder: IMF chief Kristalina Georgieva and JPMorgan CEO Jamie Dimon have both warned of a possible correction in US stocks, with Dimon suggesting it could come within two years. Statistician Nassim Nicholas Taleb, author of The Black Swan, cautions investors to prepare for a major reckoning, fueled by the US debt crisis and unchecked market optimism.

Other countries are also feeling the strain. France and Japan, for instance, are seeing trouble in their bond markets, while India’s stock market has remained flat, insulated somewhat by better fiscal discipline. Yet, as Ruchir Sharma of Rockefeller Capital Management notes, the US deficit now exceeds that of France and Japan, and the bond market is betting heavily on an AI-driven productivity miracle. If that miracle fails to materialize, a crash in US equities could send shockwaves across the globe.

Patience and Perspective: Lessons from History

Despite the warnings, history offers a counterweight to panic. Market downturns, bear markets, and even crashes have been short-lived compared to the length and strength of bull markets. Data from Crestmont Research and Bespoke Investment Group show that, since 1900, every rolling 20-year period in the S&P 500 has delivered positive annualized returns. In other words, long-term investors who maintain perspective and avoid knee-jerk reactions have consistently come out ahead, even in the face of historic overvaluation and market shocks.

But the lesson is clear: while patience pays, ignoring valuations and risks entirely is a gamble. Investors today must balance optimism about technology and innovation with a sober assessment of fundamentals. The market may be pricing in a future that’s brighter than reality can deliver, at least in the near term.

The current landscape of US stock markets is a precarious mix of euphoria and warning signs. Jerome Powell’s candid assessment, echoed by global financial leaders, marks a rare moment of clarity amid the hype. Whether the market’s AI-driven rally can withstand the weight of unsustainable valuations and unresolved structural risks remains the critical question. For investors, it’s a time to remember that every bull market ends, but disciplined, long-term strategies have always survived the storm.