“The market can stay irrational longer than you can stay solvent,” by John Maynard Keynes

By most popular valuation metrics the stock market is overvalued. According to “The Buffett Indicator,” which divides the total US stock market value ($65.47T) by the gross domestic product ($30.15T), the US stock markets valuation in June, 2025 was 217% or roughly 68.63% above the historical average. In this article, we’ll explore what “overvalued” means, examine key valuation metrics and share smart strategies for investing in today’s richly priced market.

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What Does an Overvalued Stock Market Mean?

Analysts compare historical valuation measures, like price/earnings and price/sales ratios, with their averages. When valuations drift significantly above historical norms, it’s likely that the stock market is “overvalued.”

Shiller P/E Ratio (CAPE)

One of the most respected valuation tools, the Shiller or CAPE (Cyclically Adjusted Price-to-Earnings) ratio, compares today’s S&P 500 price to the average inflation-adjusted earnings over the past 10 years. This method smooths out earnings volatility and adjusts for inflation.

• October 2025 Shiller P/E Ratio: 39.00
• Historical Average: 17.29
• Implied Overvaluation: ~126%

S&P 500 Price-to-Sales Ratio

This metric divides the S&P 500’s market price by its trailing 12-month sales (as of March 2025):

• Current Ratio: 3.31
• Historical Average: 1.80
• Implied Overvaluation: ~84%

Buffett Indicator

As mentioned earlier, the Buffett Indicator currently sits at 217%, suggesting the market is strongly overvalued.

Taken together, these metrics suggest the market is overvalued by 69% to 126%, depending on the measure.

Is the Stock Market in a Bubble Now?

Historically, the only time the Shiller P/E ratio exceeded today’s level was in October 1999, when it hit 44.19. That peak preceded the dot-com crash, during which the S&P 500 fell from $1,465 in December 1999 to $735 in February 2009.

Does this mean a stock market crash is coming? Not necessarily. Markets tend to revert to their mean valuations, but timing corrections is notoriously difficult.

S&P Value from 1985 – 2025

Source: yahoo!finance

For those of you who don’t remember, at it’s peak valuation the S&P 500 was priced at $1,465 in December 1999. During the ensuing decade, as the dot com boom ended and the tech bubble burst, the stock market fell to $735 in February 2009.

The stock market typically reverts to its mean valuation, eventually. But the timing of the next stock market decline is unknown.

Maybe the Stock Market Isn’t in a Bubble

Some analysts argue that AI-driven productivity could justify higher valuations. If corporate earnings grow faster than asset prices, valuations could normalize without a crash.

Others believe that today’s market leaders are profitable and established, unlike the speculative tech firms of the late 1990s. At the close of the last millennium, many companies with minimal earnings were richly valued.

Where to Invest in an Overvalued Market?

In the “S&P Value from 1985 – 2025” chart above, stock market prices have peaks and valleys, yet the long term trend remains upward. Those that sell during downturns typically get burned. That’s because you need to be correct twice, first, when to get out, and second, when to get back in.

Timing the market and picking the best times to get in and get out is a fool’s errand. The best strategy for investing is to choose an investment strategy and stick with it. Just remember not to put money in the stock market that you’ll need in the next five to seven years, because in the short term, the stock market pricing is quite volatile.

Source: Calamos Asset Class Quilt

The asset class quilt image above, underscores the importance of maintaining a diversified investment portfolio. Pay attention to U.S. stocks annual performance and you’ll find some years, returns are at the top, while in others they underperform other asset classes.

Here are several investing ideas for a richly valued stock market:

Where to Invest in an Overvalued Stock Market

1. Cash Investing

After years of near-zero interest rates, cash isn’t such a bad place to be anymore. If you’re skittish about the U.S. stock market valuation today, you can get paid to wait for fairer valuations by investing in cash.

Granted this is a capital preservation strategy, not a growth approach. Yet, sometimes cash preservation is a wise tactic, especially in a richly valued investment market.

Platforms like M1 Finance and Wealthfront provide competitive cash accounts. (I invest with M1)

2. Bond Investing

Bond ETFs and individual bonds offer capital preservation and income. Bond investors can choose from conservative Treasury bond ETFs to riskier Corporate and High yield bond ETFs.  The current declining interest rate environment typically provides bond appreciation and higher yields than your bank savings account.

Apps like Groundfloor, invest in real estate debt enabling you earn income when investors repay their loans. (I invest with Groundfloor.)

Get a $50 bonus, when you invest $100 in Groundfloor.

3. Dogs of the Dow

If you’re wondering whether stocks are overvalued right now, but don’t want to avoid the U.S. stock market, you might investigate the “Dogs of the Dow” strategy. The Dogs of the Dow, popularized by Michael B. O’Higgins in 1991, recommends buying the 10 highest dividend yield stocks every January, and selling in December (if they’re not on the list).

For a hands-off approach consider the ALPS Sector Dividend Dogs ETF (SDOG), with a 0.36% annual expense ratio.

Is the Stock Market Overvalued? Wrap Up

While today’s stock market valuations may appear stretched by historical standards, that doesn’t mean investors should retreat entirely. History shows that markets can remain elevated for extended periods, and timing a correction is notoriously difficult. Instead of trying to outguess the market, focus on building a resilient portfolio that aligns with your goals and risk tolerance.

Diversification remains your best defense against uncertainty. Whether you lean into high-yield cash accounts, broaden your exposure with bonds, or selectively invest in dividend-rich equities like the Dogs of the Dow, the key is to stay disciplined. Remember, investing isn’t about predicting the next downturn—it’s about preparing for it. By maintaining a long-term perspective and embracing a balanced strategy, you’ll be better positioned to weather volatility and capitalize on future opportunities when valuations normalize.

FAQ

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