📉 Is the Stock Market Over-Valued?

Is the stock market getting too over-valued? What one economic expert says about it, in this week’s Fastest 4 Minutes in Finance.

Brian Wesbury is the Chief Economist for First Trust Advisors, an investment company that we utilize among others for our client’s portfolios.

He has been warning that the stock market is overvalued for the past two years.

🔮 Brian Wesbury’s Fair Value Model for the S&P 500

In a recent article, he explains why. He uses a model to determine the fair value of the S&P 500 Index. In the simplest terms, the model looks at stock data like the price-to-earnings ratio for the Index, but it also factors in the 10-year Treasury yield. The higher the yield, the less stocks are worth.

Using a 4.25% treasury yield, Wesbury says the market is overvalued by roughly 40%. Now, before you spit out your drink over that, he does NOT believe the market will actually drop 40%. It’s just a model. But, he does believe the S&P 500 Index is out over its skies and a correction coming. First Trust has an end of year target for the Index of 5,200. That would be about a 19% drop from where we are at the time of this recording.

That’s still a deep drop that could rattle investors. But, Wesbury offers some optimism about the future of the stock market.

✂️ Federal Reserve Rate Cuts and Treasury Yields

First, it’s likely that the Federal Reserve will cut interest rates, which will bring down Treasury yields. If the data continues to show a slowing economy, and, if there is a stock market correction, they may cut rates even more. Wesbury says a 2.85% 10-year yield would put the market a fair value now.

💻 AI, Technology, and the Dot-Com Comparison

And second, he compares 2025 with the Dot-com boom and bust of the 1990’s. He says the market was actually right in the 90’s. It was just early. He writes – quote – cellphones, fiber optics, internet connections, and faster computers with better operation systems would boost productivity and profits. It was just early. Is AI the magic technology that provides immediate and permanent returns? So far, the jury is still out.

🚨 Concentration Risk in the S&P 500 Index

And finally, Wesbury points out that the top 10 tech stocks that receive all the AI buzz represent almost 40% of the S&P 500 Index. There are plenty of sectors in the Index that look attractive.

🗣️ Bottom Line – Stay Invested Through Volatility

Bottom line – the S&P 500 Index is up nearly 10% year-to-date, following two years of massive returns. It is wise to expect volatility in the coming months. But, it is also wise to stick to a plan of staying invested in stocks for long term growth, while considering portfolio adjustments for the short-term with the help of a financial advisor.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Independent Advisor Alliance. Independent Advisor Alliance and GenWealth Financial Advisors are separate entities from LPL Financial. Brian Wesbury is not affiliated with GenWealth or LPL Financial.