S&P 500 high valuation may become the "new normal," AI and profit growth reconstruct market logic

According to the Zhitong Finance APP, as the trading price of the S&P 500 index approaches historical peaks and valuation levels near those of the internet bubble era, strategists are re-evaluating the current market's "new normal" benchmark.

Bank of America stock strategist Savita Subramanian suggested in a client report last Wednesday that rather than expecting a mean reversion of price-to-earnings ratios to past levels, the current high valuations should perhaps be viewed as the new normal—this perspective reflects Wall Street's cognitive restructuring due to the accelerated application of artificial intelligence and strong profit growth.

Sam Stovall, Chief Investment Strategist at CFRA Research, stated that although current valuations remain above long-term averages, they have become more reasonable compared to the past five years of a market dominated by large-cap stocks with strong fundamentals.

He pointed out that over the past 20 years, the long-term average expected price-to-earnings ratio for the S&P 500 index has been about 40% higher, while in the last five years, as large technology stocks dominated market capitalization and profit growth, the premium rate has narrowed to single-digit highs.

This shift in valuation logic has sparked broader discussions. Federal Reserve Chairman Jerome Powell previously admitted that market valuations are "quite high," a statement that has been linked to former Federal Reserve Chairman Alan Greenspan's 1996 "irrational exuberance" speech—after which the internet bubble burst more than three years later.

iCapital Chief Investment Strategist Sonali Basak warned that trying to precisely time the market top is often an expensive mistake. After Greenspan's warning, the market continued to rise for several years, and investors who stood by missed a fivefold increase in the Nasdaq index; this historical lesson is influencing the current market narrative.

Veteran market participant Ed Yardeni emphasized that although the current expected price-to-earnings ratio of 22.8 for the S&P 500 is close to the 25 times peak of the 1999 tech bubble, corporate earnings have grown in sync with stock prices.

Taking the technology and communication sectors as an example, at the end of the 1990s, they accounted for about 40% of the S&P 500's market capitalization but only contributed 23% of profits; today, their market cap share has reached a record 44% and contributes 37% of profits. He noted that future earnings and revenues still have room to rise, with third-quarter performance expected to set new historical highs.

Wall Street generally believes that while current high valuations are significant, they do not constitute a bubble. Gene Goldman, Chief Investment Officer at Cetera Financial Group, stated that the market is expected to perform strongly in 2025, and a short-term pullback of 3%-5% is actually a buying opportunity.

Goldman Sachs analysis pointed out that strong GDP growth, resilient consumer spending, and high cash levels in the market are key factors supporting the stock market, asserting that "only an economic recession would trigger a bear market," and the current economic situation is robust.

A risk that requires more vigilance is the phenomenon of "performance chasing," where investors collectively rush in at year-end to boost stock prices rather than causing a crash. Goldman Sachs believes that strong earnings expectations for 2026 and Federal Reserve interest rate cuts could expand market participation and potentially drive the stock market to continue operating at high levels