Fed's Powell says stocks are 'fairly highly valued.' These 3 charts show he's right.

By Joseph Adinolfi

Several popular valuation metrics for U.S. stocks are at, or approaching, record highs

Jerome Powell said Tuesday that stocks were "fairly highly valued."

During an appearance in Rhode Island on Tuesday, Federal Reserve Chair Jerome Powell appeared to cause a stir in the equity market when he said that stocks were "fairly highly valued."

Powell's comments, coupled with creeping doubts about the durability of the artificial-intelligence trade, were widely blamed for a bout of market weakness. By the time the closing bell rang, the Nasdaq Composite COMP had fallen by 1%, tallying its biggest daily drop since Aug. 29, according to Dow Jones Market Data.

Regardless of where they believe stocks might be headed, many stock-market strategists at least acknowledge that Powell has a point. The relentless rally for the S&P 500 SPX and Nasdaq over the past three years has carried several widely used valuation metrics to record or near-record levels.

Powell isn't the first Fed chair to call out exceedingly high valuations in the equity market. Ed Yardeni, founder of Yardeni Research, immediately likened Powell's comments to a now-famous remark made by Alan Greenspan, who led the central bank under four presidents beginning with Ronald Reagan.

During a speech on Dec. 5, 1996, Greenspan said: "But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions?"

Greenspan has been widely credited with popularizing the phrase "irrational exuberance" - which came to define the dot-com bubble - although the market wouldn't reach its peak until more than three years after he made that speech.

Whether a similar fate awaits the current bull run remains to be seen. Here, MarketWatch highlights three charts that back up Powell's point.

The CAPE ratio

The CAPE ratio, a popular valuation metric devised by Yale economist Robert Shiller, has been pressing higher since the bull run began. It stood just shy of 38 as of late August, a level it hasn't visited since late 2021. Back then, the first signs of what would become a painful bear market were beginning to emerge.

Unlike other popular valuation metrics, which measure the level of the S&P 500 against expected earnings, sales, cash flow or some other metric, the CAPE ratio takes the level of the S&P 500 and divides it by the average inflation-adjusted earnings of its constituent companies over the past decade.

Shiller's website only updates the S&P 500 CAPE ratio once a month, but there are signs it has pressed even higher over the past few weeks as stocks have continued to climb.

Charlie Bilello, chief market strategist at Creative Planning, said earlier this week in a post on X that the S&P 500's CAPE ratio had crossed above 40 for the first time since 2000. Back then, the post-dot-com bear market was just getting under way.

Buffett indicator

Some analysts like to compare the aggregate value of the U.S. equity market with the total output of the U.S. economy.

This has become known as the "Buffett indicator." During an interview with Fortune in 2001, Berkshire Hathaway Chair Warren Buffett said that comparing the market capitalization of all U.S. stocks to gross domestic product offers "probably the best single measure of where valuations stand at any given moment."

An analysis from Dow Jones Market Data showed that U.S. stock-market capitalization stood at about $64.5 trillion as of the end of June. Meanwhile, the most recent reading on GDP in the second quarter put the total size of the U.S. economy at $23.7 trillion when measured at 2017 price levels. On this basis, stocks are currently valued at about 2.7 times GDP, the highest level going back to at least March 2001.

A representative for Buffett once told MarketWatch that the legendary investor doesn't recommend trying to time the market. "Throughout his adult life, Mr. Buffett has told people not to attempt to predict stock market behavior," the representative said at the time.

Still, others believe the indicator is a useful metric for measuring equity valuations, given that corporate earnings - in theory, the most important variable for investors - are largely driven by broader activity. It can also offer a useful read on whether valuations are becoming disconnected from underlying economic reality.

"The reason you'd look at the Buffett indicator is it shows the valuation of assets relative to GDP and the economy and economic activity throughout the country," Michael O'Rourke, chief market strategist at Jones Trading, said during an interview with MarketWatch.

"When you hit these new record levels, asset prices are well ahead of where they have been relative to the size of the U.S. economy," he said.

Price to sales

Compared with the revenues brought in by member companies, the S&P 500 has never been more expensive than it is right now.

According to Dow Jones Market Data, the price of the S&P 500 relative to expected sales over the next 12 months stood at 3.12 in late August, the highest level on record, according to data going back to January 2000. Yardeni also said that the metric is currently at a record high.

Some analysts see price-to-sales as a more realistic measure of equity-market valuations. Companies can boost or lower net income, the most commonly cited earnings figure according to what are referred to as generally accepted accounting principles, by tweaking noncash expenses like depreciation and amortization.

Then again, U.S. corporate profit margins are back near record highs, according to FactSet data. That means comparing the current price-to-sales ratio to where it stood in the past isn't exactly an apples-to-apples comparison.

Valuations are certainly an important factor in investors' decision-making process. But reams of Wall Street research have shown that they have very little predictive power regarding where the market might be headed over the next 12 months.

A 'new normal'?

Yardeni pointed out that earnings expectations have been rising at a faster pace over the past few weeks, which suggests that corporate profits will hit another record high in the third quarter. Strong earnings growth, in theory, makes investors more willing to accept higher valuations.

Bank of America's Savita Subramanian, one of the bank's top equity strategists, doesn't see any reason for immediate concern. High valuations might simply be part of a "new normal" for investors and markets. After all, the biggest U.S. companies of today look a lot different than their counterparts from the 1980s and 1990s.

These days, members of the S&P 500 sport lower debt-to-equity ratios. For larger firms, floating-rate debt has been almost entirely eradicated, helping to make debt-service payments more predictable.

Profits for the largest companies have risen, while earnings volatility from quarter to quarter has declined. High-quality companies now make up more than 60% of the index, compared with under 50% two decades ago, according to BofA. Companies have also grown more asset-light, helping to lower their fixed costs, while automation is increasingly helping reduce labor costs.

"Perhaps we should anchor to today's multiples as the new normal rather than expecting mean reversion to a bygone era," Subramanian said in commentary shared with MarketWatch on Wednesday.

Stocks were wavering between gains and losses early Wednesday. The S&P 500, Dow Jones Industrial Average DJIA and Nasdaq Composite were all in the red in recent trading.

Mike DeStefano contributed.

-Joseph Adinolfi

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09-24-25 1206ET