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The AI craze is heating up and pushing US stocks to new highs, but some investors are starting to worry that a bubble might be forming. The skyrocketing valuations are making them nervous, especially considering the more than 25% surge in $S&P 500(.SPX)$ since late October.
Economist David Rosenberg pointed out three glaring divergences in the stock market earlier this month, hinting at an inevitable pullback.
Despite the strong performance of $DJIA(.DJI)$ and $S&P 500(.SPX)$ , the Dow Jones Transportation Average, a bellwether of economic health, is lagging. The HYG/TLT ratio is trending down, and even the tech sector is starting to show weakness.
His US stock model is now showing the most bearish levels since January 2022, when the market tanked 25% over the next nine months.
Rosenberg said, $S&P 500(.SPX)$ is overvalued, the market was still in a bubble, and the valuations were even higher than at the peaks of 2007, 1990, and 1980. In the short term, sentiment and momentum are powerful drivers, but fundamentals always win out in the end.
Michael Hartnett, chief investment strategist at Bank of America, also warned last month that $S&P 500(.SPX)$ was edging closer to bubble territory. He pointed out that the concentration of semiconductor stocks—measured by the ratio of the Semiconductor Index SOX to $S&P 500(.SPX)$ —is even higher than during the dot-com bubble in 2000.
And Warren Buffett's favorite valuation signal is also approaching record levels, indicating that stock valuations are sky-high.
Looking at individual stocks, it's not just AI stocks that are skyrocketing. From chicken wing restaurants to biotech companies, valuations across the board are reaching unsustainable levels in the long run. So cautious investors looking for steady returns should be extra careful with overvalued stocks in the US market.
Here's a list of the top 10 stocks in the US market with the highest valuations based on price-to-sales ratio (and a market capitalization of at least $10 billion). Buckle up, it's a wild ride!
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