Investors have plenty to be pleased with lately. However, this has raised concerns among some on Wall Street.the 2025 rallycould be living on borrowed time.
The Dow Jones Industrial Average rose 0.2% on Tuesday, ending at a new all-time high, marking a 5.2% increase in its strongest quarterly performance in a year.Interest ratesare descending. Strong earnings growth continues. Tax reductions are expected to enhance corporate finances. Analysts are quickly increasing their year-end projections for the S&P 500.
But the increases have reached a point where some investors are starting to fear it’s becoming excessive. October has historically been a challenging month for stocks, and many investors notice indications of overvaluation—such as rapid growth—from surgingspeculation on meme stocksto inflated corporate valuations—that may signal a decline.
“The traits of this rally concern me somewhat, and it seems a bit late in the game,” said Nate Thooft, chief investment officer for equity and multi-asset solutions at Manulife Investment Management.
Many believe the improvements at least have a solid foundation. The economy has demonstrated strength. Thejob market is coolingbut not collapsing, and the trade conflict has not yet driven a major increase in inflation. Experts now believe a recession fueled by tariffs is unlikely, contributing to a 14% rise in the S&P 500 index this year. The Dow industrials and Nasdaq composite have increased by 9.1% and 17%, respectively.
The rally has also expanded to underperforming stocks expected to gain from reduced borrowing expenses. The Russell 2000 index, which monitors smaller U.S. companies, recently reached its highest level ever since 2021.
The bond market has also seen a reduction in pressure, as expectations of further interest-rate reductions have contributed to an increase in government bond prices. This has caused the 10-year Treasury yield, a major indicator for borrowing costs for individuals and businesses, to drop to 4.149%, lower than its level at the end of June, as reported by Tradeweb. Corporate bondshave also rallied, reducing the additional return that investors require to hold corporate bonds over risk-free Treasuries to its lowest point in decades.
However, some worry that this year’s 28 S&P 500 records are creating the type of excess that often signals the end of a rally. For instance, individual investors are fueling a wave of speculation similar to that seen in 2021. Opendoor Technologies, a real-estate technology platform and the symbol of thenew group of meme stocks, has increased by 398% this year and at times made up as much as 13% of the total trading volume in the U.S. stock market on a single day, according to Dow Jones Market Data.
Another issue: the resurgence of special-purpose acquisition companies, or SPACs. ASPAC is a blank check companythat generates funds and is listed on a stock market with the primary goal of acquiring a private company and making it publicly traded.
Over 90 SPACs have secured approximately $20 billion this year, marking the highest number and fundraising amount for the year since 2021, as reported by SPACInsider data. This occurred just before the Federal Reserve’s efforts to combat inflation led to a downturn that wiped out tens of billions in market value.
And stock prices of new companies listing through traditional methods have risen approximately 34% on average on their first trading day this year, marking the highest average increase since at least 2000, as reported by Callie Cox, chief market strategist at Ritholtz Wealth Management.
In the meantime, the rapid surge in artificial intelligence stocks is causing concerns about a potential bubble. The Magnificent Seven major technology firms—Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla—currently account for approximately 37% of the S&P 500’s total market value, the largest proportion ever recorded.
Increasing investor worries, some have cautioned that President Trump’s tariffswill eventually fuela rise in inflation, possibly hindering the Fed’s decision to lower interest rates and increasing stress on U.S. households.
Mary Ann Bartels, the chief investment strategist at Sanctuary Wealth, stated that she expects stock prices to drop between 5% and 10% in the near future if inflation begins to rise and leads to an increase in Treasury yield rates.
These concerns have resulted in poor performance among transport stocks, which include railroads and airlines responsible for moving the freight that fuels the economy. The Dow Jones Transportation Average has dropped 1.1% this year, indicating that investors anticipate reduced demand for products, raw materials, and travel.
And gold futures, frequently considered a hedge against inflation and a safe option for anxious investors, achieved their strongest first three-quarters of a year since 1979. Silver futures have increased by 60%, approaching their own all-time high.
Overvalued stocks are also casting doubt on the ongoing market surge. According to Bank of America, S&P 500 companies are the priciest ever as measured by four distinct indicators.
This prompts certain investors to search for undervalued opportunities, contributing to a wider distribution of market focus away from high-priced industries. Bob Doll, CEO of Crossmark Global Investments, mentioned that his company holds stocks of firms that are inexpensive when evaluated by their price-to-free-cash-flow ratio and possess strong earnings, including those in the financial sector.
“We are currently in a high-risk bull market,” stated Doll.
Write to Krystal Hur atkrystal.hur@wsj.com
