Markets rarely linger in equilibrium. The pendulum of sentiment swings between fear and greed, and this year has been no exception. After April’s lows, the S&P surged over 30 percent in just two months, one of the fastest rallies in recent history, while the TSX hit multiple all-time highs.
Yet, the mood among investors remained divided. The summer enthusiasm saw a return of speculative fervour: meme stocks and cryptocurrencies (consider that Fartcoin reached a market cap of $1 billion). Many younger investors, who came of age during the low-rate post-pandemic era (and notably have never experienced a prolonged bear market), leaned into the euphoria. More seasoned investors, meanwhile, appeared to be climbing the proverbial “wall of worry,” mindful of cycles past. One driver has been the substantial optimism over artificial intelligence (AI). In the first half of 2025, AI capital expenditures contributed more to U.S. GDP growth than consumer spending.1 This has prompted some analysts to ask: Would the U.S. economy have contracted without this massive spend? The top four tech firms alone are on track to spend $344 billion in AI capex this year—about one percent of total U.S. GDP.2 Indeed, the excitement pushed valuations to elevated levels. By summer’s end, the S&P 500 traded at 22.0x forward earnings; well above its long-term average of 16.7x, with the top 10 stocks at 28.8x.3 The S&P/TSX sat lower at 17.0x, reflecting Canada’s heavier weighting in value oriented sectors like energy and financials.
Are we approaching bubble territory? At the height of the dot-com boom, the S&P 500 had a forward P/E of 24.2x, but many stocks traded much higher: Cisco at 200x and Microsoft at 73x! In the late 1990s, simply adding “.com” to a company’s name could send valuations soaring. Today’s tech leaders are different: profitable, diversified, generating substantial cash flow and leaders in innovation. During the bubble of the “Nifty Fifty” era in the 1960s and 1970s, Polaroid traded at 90x earnings, yet investors still justified such multiples for “one decision” stocks—buy and never sell.4 Today’s extended valuations may be viewed through several lenses. Lower interest rates increase the present value of future cash flows. Higher multiples are often justified for high growth sectors like technology, when innovation and productivity gains are expected to persist. Supply/demand dynamics have also shifted: the number of U.S. publicly-listed companies has shrunk by half from its peak of 8,000 in 1996, while retail participation has surged: 62 percent of U.S. households own stocks, up from less than 40 percent in 1990.5 And, of course, investor euphoria has fuelled gains.
While momentum can carry further than many anticipate, fundamentals eventually reassert themselves. Earnings growth and return on capital, among others, drive long-term performance, even when short-term dislocations occur. Elevated valuations can reduce upside potential if prices already reflect optimistic outcomes, and amplify downside risk should expectations falter. The price you pay remains important to achieving strong long-term outcomes. Valuations may not forecast short-term movements, but they remain a dependable compass, helping investors steer between the twin forces of fear and greed.
As the cooler days approach, it is a reminder that the end of the year will be here before we know it. If you need assistance with any investing matters in these final months of 2025 (see pg. 3, in brief), please call the office. This Thanksgiving season and beyond, we/I remain grateful for your trust and wish you a lovely fall.
