Are We in a Stock Market Bubble? (Q4 2025 Update)
By: Brian Seay, CFA | Capital Stewards
The stock market currently "feels" overvalued to many investors. It is the magic question I hear most often from clients here in Huntsville and friends across the country: "Are we in a stock market bubble?"
When you look at the economy day in and day out, the disconnect between Main Street and Wall Street can feel extreme. The phrase "irrational exuberance" is back in the media headlines. But is this really a bubble, or is it rational growth driven by powerful earnings?
In this episode of the Capital Stewards Podcast, we dive into the history of market bubbles to answer the question no one seems to want to answer on the record.
How We Measure a "Bubble"
Before we panic, we need to define our terms. How do we know when a stock is too expensive?
The simplest tool we use is the P/E Ratio (Price-to-Earnings).
If a stock index has a P/E of 10, you are paying $10 for every $1 of earnings the company generates.
Another way to view it: It would take 10 years of current earnings to recoup your investment.
To understand where we stand in late 2025, we have to look at where we have been.
A History of Market Manias: 1929 and 2000
There are two modern examples of true market bubbles that burst with devastating consequences: the 1929 crash and the Dot-Com bubble of 2000.
The 1929 Crash
In the Roaring 20s, stock valuations doubled from 10x earnings to 20x. In 1929 alone, they spiked to nearly 32x earnings before the crash. This wasn't just optimism; it was fueled by margin (borrowed money), which magnified the crash when sentiment shifted.
The Dot-Com Bubble (1999–2000)
In the 90s, the S&P 500 rose from 15x earnings to 25x earnings. Investors poured money into companies with zero profits.
The Poster Child: Webvan. This company promised Amazon-like delivery but lost money every single year. It went public with a valuation of $4.8 billion despite never turning a profit, eventually going bankrupt.
In both cases, there was no single "trigger" event. Sentiment simply shifted, and because the market was built on leverage and "irrational exuberance," the sell-off was violent.
The 2025 Verdict: Bubble or Rational Growth?
So, how does the market of late 2025 compare to those historical disasters?
1. Market Valuation (The Data)
We look at the Shiller CAPE Ratio, a long-term valuation measure.
Dot-Com Peak: 44
Current (2025): ~37
A CAPE of 37 is high—it matches the levels we saw in 2021—but it is not yet at the extreme of the 2000 bubble.
On a standard P/E basis, the S&P 500 trades at 22x next year’s earnings.
Historical Average: 18x
Bubble Territory: 25x+
To reach "bubble" levels (25x), the S&P 500 would need to rise another 17% from here, assuming earnings stay constant. We are expensive, but not yet at the peaks of 1929 or 2000.
2. Real Earnings vs. Hype
This is the biggest difference between 2000 and 2025. In 2000, investors bought companies like Webvan that had no profits. Today, the rally is driven by massive cash flow growth in companies like NVIDIA, Alphabet, and Meta.
NVIDIA: Net income rose from ~$4B (2022) to tracking over $70B annually today.
Alphabet (Google): Net income moved from $75B to over $115B.
These companies are generating tens of billions in real profits. There are no "Webvans" driving this rally; there is real underlying business momentum.
The "Yellow Light" Risks
While I don't believe we are in a bubble, there are flashing "yellow lights" that investors—especially those nearing retirement—should watch.
Margin Debt: Total margin debt is now over $1 Trillion. While this is concerning, it represents just over 3% of GDP, similar to 2017 levels. It isn't an immediate crash signal, but high leverage accelerates losses if the market turns.
Hidden Leverage: The explosive use of options and leveraged ETFs (like triple-leveraged Nasdaq funds) adds hidden risk to the system.
Summary: What Should You Do?
If you are waiting for the bubble to burst, you might be waiting a long time.
The Verdict: The market is expensive, but it is not irrational. The stock price increases are largely supported by earnings growth.
The Risk: The real danger isn't a valuation pop, but a recession. If the labor market weakens further and we slide into a recession, valuations will reset.
Instead of trying to time the top, focus on discipline. Your portfolio should own the high-growth tech stocks that are driving returns, but it must be balanced with boring assets—bonds, gold, and international stocks—that can protect you if sentiment shifts.
If you are concerned about how a market correction could impact your retirement plans, let’s have a conversation.