Is the Market Getting Ahead of Itself?

I launched Main Street Investor during the sharp sell-off back in April. If you recall, I urged investors not to get scared out of the market during that downturn. If you kept a level head, you likely had much to gain. Now that we’re approaching all-time highs, I want to share my thoughts on investing in this kind of climate.

As I said in Navigating Market Turmoil, investors often get spooked into poor decisions during downturns. Just as important, though, is avoiding recklessness when markets are going well. I believe the risk now lies more in the latter. I’m not here to call market tops or bottoms, but I hope to provide guidance on how to think both strategically and tactically across different market conditions.

Incredible Market Resilience

I’ve been astounded by the market’s ability to keep pushing upward despite serious challenges. Back in April, when pundits were calling for the end of American exceptionalism, the main threat was Trump’s trade war. While that was a major concern, there wasn’t much else holding markets back.

Fast forward to today: we’re facing rising jobless claims, a U.S.-involved geopolitical conflict, and still no resolution to the trade war. I wouldn’t say these issues make me extremely bearish, but it is surprising that the market has largely shrugged them off. While the fallout from an American strike on Iran’s nuclear infrastructure appears limited for now, I’m not sure that risk is priced in at all. I don’t claim to be a geopolitical expert, but based on what I’ve followed, it wouldn’t take much for the situation to spiral and hit markets hard. I’m not predicting that outcome—but I also don’t think it’s being adequately accounted for.

Additionally, I doubt we’ve seen the last of the trade war drama. Trump paused tariffs for 90 days to reassess, but I wouldn’t be surprised if we resume the same back-and-forth. While I’m more confident now than in April that Trump won’t intentionally tank the economy with tariffs, trade tensions could easily escalate beyond what most expect—and markets seem oblivious to that.

Lastly, jobless claims have reached their highest point since 2023. This isn't yet cause for alarm, but to me, it's one of the most important macroeconomic indicators. Gainful employment is the secret sauce for a strong economy. There are some signs that hiring is slowing—yet the market doesn’t seem to care.

Some Pockets of the Market Are Getting Out of Hand

Beyond the macro and political concerns, I’m increasingly convinced that speculation has pushed parts of the market to irrational levels. A.I., self-driving cars, and blockchain are all the rage right now—and some of the hype is warranted. These industries could absolutely reshape the world sooner than we expect. But I also think investors are abandoning fundamentals in the process.

It’s beginning to feel a bit like the post-COVID market frenzy. Certain sectors are seeing a flood of speculative bets and are overdue for a breather. Take Circle Internet Group, for example—a major digital currency player that’s up over 750% since going public just a month ago. The stock trades at nearly 3,000 times trailing earnings and 31 times sales. These numbers are simply irrational. That’s not to say Circle can’t eventually grow into those valuations—but right now, the stock is far beyond any reasonable metric.

Then there’s Tesla, a well-established company now trading at nearly 200 times trailing earnings and 12 times sales, largely based on optimism about its robotaxi and humanoid robot divisions. These are just two examples of highly speculative bets dominating today’s market.

What’s My Point?

The S&P 500 is trading around 23.5 times earnings—not extreme by historical standards. And there’s plenty to be optimistic about in the medium term. So I’m not especially concerned about investors getting burned by buying quality stocks at these levels. What does worry me is that some investors are throwing due diligence out the window due to FOMO—fear of missing out—on the high flyers.

Just as I advised prudence during the April downturn, I encourage the same now. It’s tempting to chase high-performing stocks in a market like this, but I urge caution. Markets usually correct—or at least pause—to return to more realistic valuations.

Look again at Circle Group. Many new investors see a stock that’s done nothing but rise over the past month and feel compelled to jump in, hoping for a quick win. But a stock like that can collapse just as quickly. With no real fundamentals supporting its current price, it’s running purely on momentum and speculation. And when that runs out—as it often does—investors can get burned quickly. Speculative bets like these can leave a real dent in your portfolio.

On a broader scale, I believe the short-term risk now leans toward a downturn. That doesn’t mean I’m bearish across the board—but I do think a market breather is likely soon.

So What Should the Average Investor Do? 

I’m not saying avoid investing or keep all your cash on the sidelines. I’m saying: be prudent. Don’t buy something just because it’s a recent big winner or because every CNBC analyst says it’s going to change the world.

Just like I said during the downturn, I’m now calling for rationality in the face of excessive speculation. Build your own investment theses. Do your own research. Stick to your metrics and your process. Don’t throw out your philosophy just to avoid missing the next big thing.

That said, I do believe there are several megatrends shaping up over the next decade that investors should start positioning for now. I’ll write more on that soon.

In the meantime, continue developing and refining your investment philosophy—and stick with it. A sound philosophy will guide you through bear, bull, and sideways markets alike.

As always, nothing in this publication should be considered financial advice. Please do your own research and reach your own conclusions. While I don’t offer investment advice, I’m always open to discussing markets, stocks, and strategy.

You can reach me at: epstock10@gmail.com

Cheers,
Eric Patterson
M.S.I.

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