Are We In a Stock Bubble?

By Steve Reitmeister, Editor-in-Chief, WallStreetZen

October 2, 2025 6:38 PM UTC

I have used the chart below several times as the prime piece of evidence that stock valuations are getting stretched...especially for large (red line) and mega caps (pink).

Look at the height of the mega caps PE versus even the height of the tech bubble before popping in early 2000. That is case in point #1 for a bubble now forming.

Back in the late 1990’s, we were being told that valuations don’t matter because this time is different with the rise of the internet.

The same logic is being tossed about now with AI stocks. And yes, there is tremendous growth ahead with AI. But don’t be fooled into the same “this time is different” mindset.

Valuations will always kick into the equation. Just a matter of when.

Just sometimes we have manias like the “irrational exuberance” of the late 1990’s that blow past all the red lights to unsustainable levels.

To be clear, that valuation warning from Fed Chairman Greenspan was issued in December 1996. Yet there was 3+ more years of hot air pumped into valuations before they imploded.

That is always the trick with these events. How much higher can they go before reality catches up and things tumble back down???

Unfortunately, that is unknown and unknowable in advance.

Note that Chairman Powell tried to give a similar warning recently on 9/23 when he said that stocks are “fairly highly valued”. This led to a late day sell off that has already been forgotten as those same names are plowing higher once again.

To be clear. I don’t think now feels like the previous bubble peak in March 2000. It feels more like 1998 where there is still plenty of time on the clock before, well, every fool gets his clocked cleaned!

Here are some other signs that the bubble is forming.

Let’s remember the famous quote attributed to Joe Kennedy (as in JFK’s father) at the height of the 1929 mania before implosion.

“When the shoeshine boy gives you a stock tip it’s time to get out of the market”.

OK, we don’t have shoeshine boys anymore. But the idea is that the average person typically is not investing in stocks. Thus, when things are so easy that even the average person does get sucked into the market...then it is a clear sign of a mania with painful downside to come.

So yes, I remember the bubble of the late 1990’s all too well. And at every single event people would come talk to me to talk about stocks because of what I do for a living.

As you would expect they ONLY talked about the most obvious tech stocks. And all thought they were an investment genius. And all laughed at me for talking about scary valuations with danger ahead.

Those same folks went DEAD SILENT in 2000 and didn’t say much of anything for a long, long time after. Occasionally a question about crypto would be thrown my way (another bubble discussion for another day).

Yet more and more these stock market conversations are springing up once again. And its every Megacap and AI stock centric as you would imagine.

Last week was a perfect example, where I was walking the dogs and ran into a new neighbor. He asked the classic question “what do you do?” for which I shared my ownership stake in WallStreetZen.

He had no questions for me. Just a hearty brag that he is making a KILLING in the stock market with NVDA and other AI stocks. As if I might want to get advice from him (NOT!).

Investing is not meant to be easy. And when it is too easy that is a sign of TROUBLE!

(please read that paragraph again so it sinks in).

Another bubblicious sign is what is happening with Tesla.

Elon Musk has done his very best to destroy Tesla with his venture into politics. Since then, sales have plummeted here and abroad with the earnings outlook for the current year cut in half.

Investors initially acted accordingly with shares dropping from nearly $500 to $200. And then all of a sudden it started acting like a meme stock rising at a feverish pace even as its earnings outlook gets uglier.

No piece of evidence is more pathetic than investors bidding up TSLA’s shares 6% the day that Musk bought $1 billion in additional shares.

That was a sleight of hand trick that Musk knew would work. Meaning the 6% rally grew his personal holdings by $10 billion. Not a bad rate of return for on his investment.

Note that if TSLA was valued like other car companies like Ford and GM it would currently be priced at $20 per share. Yes...$20. Not 22X higher...and thus it is 22X overpriced.

But again, we are at the stage of the bubble where people tell themselves that valuations don’t matter. And AI changes everything. And how about autonomous cars. And this and that and the other.

Sadly, Tesla, and many other overpriced stocks can continue to inflate before their inevitable implosion.

The good news about the last serious bubble is that those focused on value were able to clean up in 2000. From my personal records I gained 16% on the year even as the bear market for the broader market started rolling out.

Same was true for the Zacks Advisor newsletter portfolio run by Ben Zacks where I was the Managing Editor. Ben knocked it out of the park in 2000 as well.

Funny story about my interview for this position back in August 1999. Ben assumed from my resume that I was just another “Johnny Come Lately buying every internet stock and thinking I am some kind of investing genius”.

He was literally yelling at me. So, I yelled back telling him he had no idea what he was talking about.

Rather, I was a classically trained value investor thanks to my father, a highly successful Financial Planner. This included my Dad’s focus on the “Intelligent Investor” from Benjamin Graham (Warren Buffetts mentor).

Ben took a long pause. I honestly don’t think anyone had ever yelled at him before. Then he said enthusiastically that...“anyone who doesn’t like internet stocks is alright in my book”.

From that moment on we were totally simpatico leading to a long term collaboration for which I am eternally grateful.

Even better than avoiding the painful losses of the bubble popping was the ability to buy stellar growth stocks like Amazon for a split adjusted 43 cents in 2001 after falling 97% from its peak. And yes, I still own those shares today.

The same happened with my buying of Priceline (now Booking) for $14.62. Those same shares are now pushing well above $5,000.

So I don’t fear a bubble forming. Just prefer that we don’t go down that dangerous and irrational path.

The logical choice would be a rotation to small and mid cap stocks. That certainly was on the menu in August with a nearly 4 to 1 outperformance for smaller stocks. A little bit of that has extended into September...but still see too much air being blown into the usual subjects in the Mega Cap space.

With history as my guide this is just feels eerily similar to what happened in the late 1990’s with internet stocks. And thus given the hubris of human nature, I think we will continue to go down this path thanks to the promise of the AI revolution.

For those already in some of these popular stocks, then best to have a trailing stop mentality. This will allow you to participate if more upside takes place, then lock in gains by selling before too much slips away.

I would use trailing stops 15-20% below the highs. Much tighter than that and you could easily be shaken out of those shares on a simple correction before the next leg higher.

Given my value roots, I cannot get on the insanity bandwagon...yet can play peripheral names benefiting from AI growth prospects like EME and UDMY where valuations are much more reasonable.

Hopefully the money outside the mega caps and AI names does shift from bloated large caps to the best small and mid caps. This was certainly in the works the past 2 months.

That is an area we can continue to excel in with the Zen Ratings as our guide. And certainly played a large role in our 3 portfolio additions today.

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