Good morning, investors. The S&P 500 reached yet another record high on Monday, driven by renewed enthusiasm in the artificial intelligence (AI) sector, particularly following news from Nvidia. The company announced a significant investment of $100 billion in OpenAI, sparking discussions about potential market froth and bubbles.
The S&P 500’s cyclically adjusted price-to-earnings (CAPE) ratio has now hit 40, a level not seen since 2000. This metric, which divides the S&P 500 by the average of its inflation-adjusted earnings over the last decade, has raised concerns among analysts. The CAPE ratio had peaked at 44.2 in November 1999, mere months before the S&P 500 reached its all-time high in March 2000. Current market dynamics echo former Federal Reserve Chair Alan Greenspan’s notion of “irrational exuberance,” with startling statistics revealing that just 4% of stocks are responsible for half of the S&P 500’s total value. Furthermore, the technology sector is trading at 29.8 times forward 12-month earnings estimates—34% above its 10-year average.
Despite these lofty valuations, many analysts argue that the tech stocks driving the current AI boom are more profitable than their dot-com predecessors. Nicholas Colas and Jessica Rabe, co-founders of DataTrek, noted in a client briefing that high valuations are countered by positive earnings revisions and anticipated Federal Reserve rate cuts, keeping stock prices upwardly mobile. Consensus earnings expectations continue to improve across all company sizes, with particular momentum in the technology sector, which is seeing the most significant forward-earnings revisions.
In light of Nvidia’s announcement and its stock climbing over 3%, there is widespread optimism regarding the potential for compounding returns from this investment in AI infrastructure. However, the bullish sentiment is tempered by cautious voices like Mark Malek, chief investment officer at Siebert Financial, who points out the risks of a market bubble. He suggests that while waiting it out could be tempting, it remains uncertain when or how the bubble may burst, whether it be through a reversal in earnings growth or a policy shift by the Fed.
There are broader economic discussions unfolding as well. Fed Governor Stephen Miran expressed a desire for lower interest rates, proposing they move into the low 2% range, arguing that the current benchmark rate is excessively high. Meanwhile, U.S. Treasury Secretary Scott Bessent hinted at potential support for Argentina’s economy, emphasizing the country’s need during a planned meeting with President Javier Milei.
In stock market developments, Apple has turned positive for the year following a 4% surge due to excitement surrounding the launch of the iPhone 17. This makes it the last of the major tech companies to achieve year-to-date positivity. Better Home & Finance shares soared 60% after a prominent hedge fund investor voiced a bullish outlook on the company. Tesla and Oracle also saw stock price increases, with Tesla’s target raised from $400 to $500 and Oracle benefiting from involvement in a significant TikTok deal.
In contrast, the Dow Jones Transportation Average is down 1.5% this year, deviating from the broader bullish trend. Meanwhile, Metaplanet made headlines with its acquisition of 5,419 bitcoin for $632 million, showcasing the ongoing volatility and interest in cryptocurrency.
On a final note, employee responses to return-to-office mandates remain varied, especially within Fortune 500 companies, indicating lingering shifts in workplace norms. Disney announced that “Jimmy Kimmel Live!” is set to return to airwaves on Tuesday, highlighting ongoing developments in the entertainment sector.
