Interesting link on Reddit about the stock market and a bubble

[Javaman]

https://www.reddit.com/r/wallstreetbets/s/Qa3E5DGVWy

This market is disgustingly overpriced, and we are due for a correction similar to what we saw during Dot Com/Global financial crisis.

I want to preface this by stating that I legitimately home someone can refute what I have to say here. I take no pleasure in the thought of people's 401k's and IRA's and pension funds getting absolutely decimated, and this post has nothing to do with politics... I think the market has been overpriced for a long time (+/- 8 years), and it is only getting worse.

**Some quick points *

**1. Price to earnings ratio**

Price to earnings ratio is at the point of absolute lunacy. The S&P 500 is over 28 today, and before the market started correcting in February, we were actually over 31. The Nasdaq is at 37 and was as high as 44. While I imagine most in this subreddit at least have a grasp of what P/E means -- for those that don't -- here's a quick summary. For purposes of this post, let's use NVDA as an example. Assume NVDA didn't have a single penny in expenses. They didn't have to pay for employees. They had no rent. There was no salary for Jensen Huang, and they didn't have to pay a penny in taxes. They somehow got all their electricity for free, and they didn't even have a COGS (cost of goods sold) -- somehow they were getting all of their materials for free. Then also assume that their sales remained exactly where they are at today... that their revenue remained identical to where it is at today, and they took 100% of that revenue, and distributed it back among the shareholders of the company. Right now -- NVDA's P/E is at 45.43 -- meaning it would be 45 years before investors recouped their money.

The entire S&P is trading over 28 today... meaning if the +/- 500 largest companies in the USA didn't have a single expense, and continued generating the same revenue, it would take 28 years for investors to get their money back.

Who in the world would be interested in signing up for that "investment" opportunity? My own mother could call me asking me to invest in her company and I wouldn't invest based on that return.

**2. The Buffett indicator**

The Buffett indicator is a simple calculation of the total value of the US stock market divided by GDP.

Historically, that number has hung out right around 1-- meaning the total value of the US stock market should be roughly the same as GDP. Buffett himself stated a value of 75-90% is reasonable, and a value over 120% signals the market is overpriced. The highest the buffett indicator has ever hit was during the dot com bubble, when it was 2.1 standard deviations above the trendline. The highest until now, that is. The market value is currently 211% of GDP, or almost 70% above what historically has been seen as normal.

**3. The stock market is insanely top heavy.**

The Mag 7 currently account for 31% of the S&P 500, and over 40% of the Nasdaq. If these 7 stocks correct, it would be absolutely catastrophic for the market as a whole. We saw this play out during Dot Com with the likes of Cisco, Intel, and Oracle. While the market was top heavy then -- it was nowhere near as top heavy as it is today... In fact -- the top 10 most valuable companies now represent more than twice as much of a percentage of value in the market as the top 10 did when Dot Com crashed.

Side note -- but I do think investors have briefly taken note of this. So much of these companies is based on perceived future growth based on revenue that can/will be generated by AI. But remember what happened when DeepSeek emerged last year -- and alerted WallStreet that an incredibly sophisticated AI can be created without pouring billions of dollars into R&D and infrastructure? The market absolutely tanked. What if it becomes obvious that these AI plays will not be unique to the largest tech companies in the world, and that these systems can be developed by any mid-cap with a decent budget?

**4. Home prices and the Housing Market**

I won't dive too deep into this, but homes are more unaffordable today than at any point in US history. Based on median US income and Median US home price, right before the Global financial crisis/mortgage crisis of 08/09 -- this number hit it's highest point in US history -- 45%.

Its highest percent *until* the last 12 months. It now takes over 46% of a family's income to purchase a home.
30% is the figure that is generally regarded as affordable.

The condo market is collapsing, particularly in Florida, where HOA dues and Insurance costs have made these properties completely unaffordable.

Foreclosures on FHA loans are also set to resume. Biden put in place a policy where anyone that wanted could simply apply for a mortgage payment deferment after COVID... meaning call your servicer, say you're experiencing a hardship, and they simply give you a deferral. None of these homes could be foreclosed upon. They then tack these payments on to the back end of the loan with the additional accrued interest. This policy still exists today, but is about to come to an end in September. As of Q1 2025, over 10.6% of all FHA mortgages are at least one payment late. Over 4% of FHA mortgages are over 90 days late.

What happens when FHA foreclosures absolutely flood the market?

What does this do to home prices, and even more importantly, what does this do to homebuilders? If inventory skyrockets (more than it already has over the last couple of months), and price pressure pushes everything down due to increased supply, will home builders still be able to make money? Homebuilding employs over 11 million americans... Plumbers, electricians, roofers, landscapers, drywallers, framers, truck drivers, etc --

When homes stop being built, unemployment skyrockets, and GDP shrinks dramatically.

**5. Consumer debt is through the roof**

Credit card debt is at the highest it's ever been, and delinquency rates are as high as they've been since emerging from the global financial crisis. Q4 of 2011 was the last time delinquency rates were this high.

Auto loan delinquency rates are the highest they've been in decades.

**6. Bonds -- worldwide -- are pushing higher and higher.**

The US is getting hit here worse than most, as it seems people are not excited about Trump's game of chicken with tariffs. Nonetheless -- you are seeing bond yields push higher and higher worldwide, as investors demand higher returns for government bonds to account for their perceived risk. Interest rates cuts have not quelled this. Despite 100bps cuts in the federal funds rate since last year, the 10 year t-note is actually up 80 ticks since then.

**7. Commercial real estate**

A massive amount of commercial real-estate will need to be refinanced in the coming 12-24 months -- and you will see these payments skyrocket. Many holders of Commercial real-estate refinanced their properties in the quarters after COVID, when interest rates were incredibly low. Most of these loans are either done on 5-year balloons, or as adjustable rate mortgages. These owners will see their payments jump by 30,50, even 70% as they are forced to refinance these properties and interest rates that are close to double what they were last time. This will be compounded by the fact that many companies moved to work from home models, or at least partial work from home models. Office space vacancy rates have skyrocketed -- meaning less tenants -- all while mortgage payments on these properties is skyrocketing.

**8. Student Loan Debt**

The government's moratorium on student loan payments has officially come to an end. 43 million Americans that have been been able to avoid making payments on their average of $38k in student loan debt for the last 5+ years are now going to have to start making payments. Those that don't will see their credit score be absolutely decimated. What other payments will the begin to fall behind on? As I mentioned previously -- credit card delinquency rates and auto loan delinquency rates are already high -- and rising. How much worse does that get when 15% of the population beings adding a several hundred dollar payment to their expenses each month?

There is a dozen other items I could list here, but in the interest of actually getting some work done today, I'll leave my post there.

I would genuinely love for someone to refute places I'm missing the mark, or why I may be wrong about my assumptions

[Silent Type]

1. You'd think market would tank, but even after trump's tariff crud created a big drop, we are now back

to levels when trump took office.

The market has been irrational for decades. So who knows. I sure wouldn’t invest at today’s levels, even if I had money.

[Bernardo de La Paz]

4. Patience. Retracements and rallies are very common in bear markets. . . . . nt

[Bernardo de La Paz]

8. Possible markets (SP500) might make even small new highs, tho unlikely. Futures down as I write this

In the last week or so, the market swung from oversold to overbought in near record time. I heard that it has been mostly retail buying of stocks.

There is a thing called a "bull trap". Bulls come in when there's a bit of a bounce off of some lows and buy up, thinking the correction or whatever is over. Then it runs out of steam and the market falls.

There's the old saying that bull markets "climb a wall of worry". I heard a new one yesterday that bear markets slide "down a slope of hope". Something about the recent rally strikes me as a slope of hope.

One way I look at it is, sure we could make new highs. But I think the downside risk is bigger and stronger than the upside opportunity.

[Meowmee]

2. What is happening now has nothing to do with a correction

It is psycho's pump and dump insider trading etc.

[Bernardo de La Paz]

3. I agree w your analysis. I didn't make same analysis; I got out early this year based on tariffs coming down the pike.

Plus, it was already by then an 18-24 month bull market which is on the long side. Plus tRump is first and foremost a chaos agent. That all was enough for me.

[kerry-is-my-prez]

6. Yep - when the crazy man got in and was talking about tariffs, I got out.

I will not invest until he is gone. He will either pull another crazy stunt or he lets all of his buddies exactly when to invest and when to get out.

[jmbar2]

5. Thanks for posting the analysis

One possible explanation that I've been pondering.

The extreme wealth that has been accrued at the top wants to go somewhere.

They may be paradoxically both holding up the market, and sitting on excess cash waiting for a housing collapse to further monopolize real estate.

[lostnfound]

7. Earnings profit, which is AFTER expenses. Also, there's residual value in the stock,...

You also don’t have to make back “every penny” from dividends (or earnings). You can recoup the principal investment when you sell the stock later on.