Dancing Near the Edge

A Closer Look at S&P 500 at Record 6,000

Amid all the holiday cheer, shopping sprees, and end-of-year chaos, you might have missed it, but the S&P 500 recently crossed 6,000. That’s the highest it’s ever been in the stock market's history.

Now, if there's one thing I know about markets, it's that they are driven by extreme emotions. People swing from peak confidence, where everyone's sharing stock tips at barbecues, to deep despair, where they can't bear to open their brokerage apps.

It appears we're currently experiencing the former phase.

But if I put on my critical hat, there are a couple of interesting things happening in the market.

For instance, did you know that while the S&P 500 Index is trading at its all time highs, less than 40% of the stocks in the index are trading above their 50-day moving average. That's a market standing on surprisingly few legs.

Look closer, and the reason is clear.

The “Magnificent 7”—Microsoft (MSFT), Meta (META), Apple (AAPL), Amazon (AMZN), Nvidia (NVDA), Alphabet (GOOGL), and Tesla (TSLA)—now make up a record 34% of the S&P 500’s market cap. That’s more than a quarter. These seven tech darlings are up an average of 70% this year, driving most of the market’s gains. And even that number is skewed by Nvidia’s near-200% surge.

Speaking of Nvidia, here’s also a fun (and somewhat unsettling) fact: its market cap recently hit $3.4 trillion. That’s larger than the entire GDP of France!

These are the realities of today’s lopsided, top-heavy market.

Here’s VERUM with some words of wisdom:

The public and the fat cats—and absolutely the politicians—all think that a high stock market is, almost by definition, a good thing. But a high stock market doesn’t necessarily mean an economy is doing well, or that public companies are doing well—it just means there’s a perception that this is the case. Or worse, in some cases—like now, I suspect—it means nothing at all, other than that people are afraid to hold currency, government bonds, real estate, or other assets and so-called assets. An artificially high stock market can send dangerous, false signals to businessmen and investors. It can cause false confidence—the kind Wile E. Coyote still has when he runs off a cliff.

Fear of Missing Out

VERUM is, of course, right on the money. Markets typically don’t crash immediately after hitting an all-time high.

And the reason, of course, is human psychology. When the stock market goes up, people tend to think it will keep going up, so they put more money into it.

Young people often refer to this phenomenon as FOMO, or the fear of missing out. It's the intense anxiety that others are enjoying exciting experiences while you're not. This fear extends to different areas of life, such as relationships, social events, and yes, stock market investing.

FOMO has a significant impact on the behavior of teenagers and adolescents. And, evidently, investors are not immune to its effects either.

But since every action has a reaction, the FOMO behavior tends to come with a bad case of hangover. Just take a look at the chart below (I switched it to a logarithmic scale so you can easily see the pullbacks over the longer timeline).

As you can see, if history is any guide, major stock market crashes tend to happen shortly after the market reaches an all-time high.

Now, once again, this usually doesn't happen right away. But if you look at the five most famous stock market crashes—the Wall Street Crash of 1929, 1987's Black Monday, the 2000 Dot-Com Bubble burst, the 2008-2009 Global Financial Crisis, and the COVID Crash of 2020—all of these occurred while the stock market was at or near its all-time high. And there were many more, some of which I highlighted in the chart above (but not all).

And these weren’t just your run-of-the-mill 5-10% corrections. These were full-blown "oh my god, honey we won’t be able to continue our mortgage payments" crashes. Just take a look at the table below.

And, not to harp on it too much, but we've just hit a new all-time high.

For many, witnessing these record highs sparks a feeling of... well, you guessed it... missing out. This sentiment is even stronger when you hit a nice round number like 6,000.

The Valuation Reality Check

But if you look at the next chart, jumping on the bandwagon just doesn’t seem like the right move right now.

The line above isn’t your regular price-to-earnings (P/E) ratio; instead, it’s the Shiller P/E ratio, an invention of Yale economics professor Robert Shiller (the same guy behind the Case-Shiller housing index).

Shiller’s P/E is the ratio of price to the average earnings of the last ten years adjusted for inflation. This calculation smooths out short-term earnings abnormalities and other distortions.

Here are a few observations that may pique your interest…

At its peak in 1929, the ratio stood at roughly 32. Today, it’s nearing 40.

Each time it crossed that upper limit in the past (as shown by the red line above)—including during the Dot-Com Bubble and the 2021 post-COVID rally—it eventually plunged well below it.

Could the S&P 500 keep climbing all the way to the Dot-Com Bubble levels of around 44? Perhaps. I mean, stranger things have happened. But is that a risk you’re willing to take?

Then there’s the historical average, which has been about 18.7 since 1923.

If the market were to revert to this norm—as tends to happen over time—it would mean one of two things: either S&P 500 companies need to seriously boost their earnings, or we'd see the S&P 500 take a dive from where it's at now, just like it has in the past when we hit these all-time highs.

I have to say, the first option feels far less likely than the second.

Here’s VERUM again:

In the past, the stock market was a straightforward bet on America: the economy would grow, companies would prosper, and stocks would rise. That was a very reasonable argument. But now the stock market is very detached from the economy. I might as well head to the casino, throw down on red, and cross my fingers for a jackpot. Ironically, you're probably better off at the casino anyway because at least you'll have a good time while you're there.

Once again, sure, the S&P 500 might keep climbing a bit longer—thanks to the FOMO factor—but it’s already way out of touch with fundamentals. Honestly, it’s probably just a matter of time before investors start selling in droves… maybe sometime next year.

If you're still in the market, at the very least avoid the most overbought stocks. When the market falls, these crowd favorites are usually the first to get dumped.

And speaking of crowds, while everyone else rushes to join the (market) party, perhaps this holiday season is the perfect time to step back, spend quality time with family, and keep a clear perspective. With that, I wish you and your loved ones a Merry Christmas and a Healthy, Happy 2025.