Howard Marks’ View on Market Highs: Where Do We Stand in 2025?

In his recent memo to Oaktree’s clients, Howard Marks outlined his views on the current high levels of the market. He believes the market has not yet entered a phase of irrational exuberance, but still advises clients to adopt a Level 5 defense (reducing aggressive positions and increasing defensive holdings).

Howard Marks is a renowned American investor and author, and the co-founder and Co-Chairman of Oaktree Capital Management. His investment memos are widely circulated on Wall Street, and Warren Buffett has openly stated that he “always reads them first.” He is also the author of The Most Important Thing and Mastering the Market Cycle, among other works.

How does Howard view market new highs and high valuations?

$S&P 500(.SPX)$ is the most closely watched barometer of the US stock market. By the end of last year, its forward P/E ratio (price relative to expected earnings for the next 12 months) was about 23—significantly above its historical average.

If valuation ratios are meaningful, this suggests a less-than-encouraging outlook for the S&P 500. In my January memo, I concluded that while this is a concern, it doesn’t represent a real threat—mainly because I believe we have not seen the temporary manias or “irrational exuberance” that usually accompany or trigger bubbles.

What are investor behavior indicators and the resulting price/value relationships?

The relatively high P/E of the S&P 500 is the primary basis for optimistic valuations.

According to the Financial Times (July 25):

• “Based on Bloomberg data, the current market cap of S&P 500 constituents is more than 3.3 times their sales—a record high.”

• “Barclays’ ‘Equity Frenzy Indicator’—a composite of derivatives flows, volatility, and sentiment—has surged to twice its normal level, entering territory associated with asset bubbles.”

• Warren Buffett’s favored measure—the ratio of total U.S. equity market cap to U.S. GDP—is also near a historic high.

Meanwhile, the relationship between the 10-year U.S. Treasury yield and the S&P 500 dividend yield suggests that, compared with historical levels, equity valuations are elevated.

S&P 500 Valuations vs. Magnificent 7

From 2023 to 2024, the S&P 500 delivered a remarkable two-year total return of 58%, with more than half of that gain attributable to the Magnificent 7. These are among the world’s very best companies, and together they now account for one-third of the index’s total market capitalization.

Because of their dominance, their lofty valuations are often cited as the reason behind the index’s unusually high average P/E. In fact, their average P/E is about 33.

That is certainly above average, but considering their superior products, massive market share, high profit growth, and formidable competitive moats, I don’t view that valuation as outrageous. (Back in 1969, when I started at First National City Bank, many of the so-called “Nifty Fifty” stocks in the bank’s portfolio traded at P/Es of 60 to 90. Now that was expensive!)

By contrast, I think the real reason for today’s elevated index valuation lies in the 493 companies outside the Magnificent 7, which together sport an average P/E of 22—well above the S&P 500’s historical average of around 15. That, in my view, is what drives the index’s high overall valuation and could be cause for concern.

1. What do you think of his views on the valuations of the Magnificent 7 and the S&P 500?

2. How is your portfolio allocated right now?

3. Since the market is at elevated levels, should we be holding some defensive assets?

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