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The Standard & Poor’s 500 — probably the most popular measure of the stock market’s performance — is sitting right near all-time highs. The S&P 500 index is also perched at one of the highest valuations of all time, indicating that investors are paying a high price for potential future earnings. These lofty expectations may have some investors nervous, particularly as a variety of other risks — the effects of tariffs, soon-to-rise inflation and uncertain monetary policy — threaten stocks’ stability.
So following a strong run-up in 2025 — and robust runs of greater than 20 percent gains in both 2023 and 2024 — are stocks poised for a crash in 2025? Here are three things to watch.
On objective measures such as a price-to-earnings (P/E) valuation, the S&P 500 appears overvalued historically. But that’s not the whole story here, especially given highly profitable big tech names such as Microsoft, Nvidia and Apple have come to dominate the performance of the index.
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The index’s forward P/E ratio — the price being paid for next year’s expected earnings — is now around 22.5, according to a Bank of America analysis. With the exception of a very brief period in August 2020, that’s the highest valuation since the dot-com peak of 1999-2000. At the height of that era’s euphoria, the forward P/E ratio touched 25 times earnings. But 2025’s crop of S&P stocks differ from the mix of yesteryear, which was less concentrated in high-quality businesses.
“Unlike many of the previous nosebleed valuations that led to eventual economic slowdowns, the S&P 500 remains highly cash flow heavy relative to previous periods,” says Edison Byzyka, chief investment officer, Credent Wealth Management.
Today’s tech titans earn tremendously attractive margins and they’re involved in one of the most highly anticipated trends of recent times: artificial intelligence (AI). The big tech names, bolstered by strong profit growth, keep growing their share of the total index, meaning the S&P’s performance relies more and more on how they perform and less on smaller companies.
“Looking at the S&P 500 index, it continues to get more and more concentrated in just a few names,” says Brian Spinelli, co-CIO, Halbert Hargrove. “I don’t know if markets are considering what happens if those handful of names run into earnings challenges or can’t keep growing earnings to keep up with their current valuations.”
