The US stock market is expensive, and that is not new. The increases that Wall Street has experienced in 2024, and which, for the moment, continue in 2025 despite having suffered specific episodes of volatility, have led the main US indices to trade well above the historical valuation average , but that is not the only sign that portends the formation of a bubble in the main stock indices on the planet. The latest signal has been given by the Russell 1000, the country’s small and medium-cap index: if the selective is divided between ‘growth’ (growth-style) and ‘value’ (value-style) firms, The differential that has opened between them was not so high since the height of the technological bubble at the beginning of the century. Thus, money seems to be seeking at all costs the ‘growth’ sector, usually represented by technology, despite the fact that its benefits are paid almost twice as much as that of ‘value’ firms.
When investors pounce on companies considered riskier, and forget about the more ‘traditional’ firms on the stock market, it is time to be extremely cautious, due to the possibility that excesses have occurred that lead to a strong correction, or even in the bursting of a stock market bubble. At least, that’s what happened in the last pure stock market crisis that the United States has experienced, the technology bubble that burst at the beginning of the century.
Now, the levels reached by the representatives of the two major investment styles in the Russell 1000 index, which includes American small and mid-cap companies, are warning of the possibility that the market has overheated. The differential between the ‘Russell 1000 Growth Total Return’ index and the ‘Russell 1000 Value Total Return’ index has reached levels not seen since the moment of the greatest bubble that occurred 23 years ago, in 2000. The price of the former is 1.49 times higher than that of the value-style selective, and its benefits are paid much more expensively than those of its ‘value’ counterpart: the growth index is trading at a PER of 34.2 times, according to the profit expected by the consensus of analysts for the year 2025, compared to 19, 1 times of the ‘value’ index.
This spread width seems to indicate that investors are placing a lot of confidence in growth-style stocks, those most closely related to the technology sector. In this sense, the market is trying to take advantage of the good prospects that exist for the benefits of the sector due to the development of Artificial Intelligence, but there are analysts who have been considering for months the possibility that a bubble has formed in the American stock market. , and they see similarities to what happened a quarter of a century ago.
Amadeu Alentorn, equity manager at Jupiter AM, explained at the end of 2024 how “although we are not predicting a similar fall, the dotcom bubble draws an intriguing similarity with the technology-dominated market that we have today,” he explains. “In the late 1990s, buying enthusiasm originated from the birth of the Internet, while today it does so from the prospects of artificial intelligence (AI). A typical behavioral bias of investors confronted with a new technology, such as the Internet or AI, is to overvalue its short-term results and underestimate its long-term transformative power.“says the expert.
This situation that the market has reached can be corrected in different ways, and it does not have to have a dramatic outcome: if artificial intelligence ends up increasing the profits of companies in the ‘growth’ sector more than what analysts expect, the Valuations of this type of companies could be adjusted to more normalized measures, and closer to those maintained by ‘value’ firms. However, investors must be cautious, because another possible outcome is that growth stocks suffer a correction on the stock market, which can now have an especially significant impact, taking into account the weight that firms in the sector have acquired in recent years. in the major American stock market indices, such as the S&P 500.
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