Is the US stock market overvalued?

The real problem today lies in the creation of a significant state of uncertainty. To build a factory, you need to know the future policies for the next 20 years—not just for a few days. It’s not enough to know the policies for two or even four years. That’s how US billionaire Bill Gates described the state of the US economy in a televised interview with Fareed Zakaria.

Despite this accurate depiction of the US economy, the US stock market has largely recovered many of its losses following the “shock” of decisions announced by President Donald Trump in early April. At the time, the S&P 500 index fell from above 6,000 points to below 5,000 points within a week, but rebounded to 5,800 points by the close of trading on May 23.

US Market vs. Global Markets

This situation raises questions about how “rational” the US stock market really is—especially given that the uncertainty has by no means dissipated, whether in terms of tariff disputes, supply chain risks, or geopolitical instability.

The US market differs significantly from many global markets in its valuations. For example, the weighted average price-to-earnings (P/E) ratio for the S&P 500 has ranged between 26 and 28 since the start of 2025. In comparison, the Indian market has a P/E ratio of 25, Canada’s is at 20, and China’s ranges around 10.

The US market is the only one where the average P/E ratio reached as high as 120 before the 2009 crash—a wildly inflated figure that defies basic logic regarding corporate and sectoral growth, especially in developed, stable economies that grow at slower rates than their emerging counterparts.

This contradicts the rationale that high P/E ratios reflect high growth expectations, especially when U.S. economic growth—including that of listed companies—is projected at just 1.4% in 2025. Meanwhile, India’s economy is expected to grow by 7%, and China’s by 4.8%–5%, raising further questions about the disparity in valuation between the U.S. and China, despite vastly different growth outlooks.

Ownership Concentration

One of the main reasons behind the US stock market's "inflation" compared to others is that a large portion of its participants lack fundamental financial knowledge. A study shows that over 66% of US market participants suffer from what’s known as the “vicious circle syndrome.”

In this syndrome, investors strive to make rational investment decisions by analyzing available data, but this often leads to exhaustion. Eventually—whether sooner or later—they end up relying on others’ advice. These "others" might include brokers, agents, social media influencers, or even AI-powered apps.

This syndrome exists in all markets, but it is particularly pronounced in the US due to the strong influence of media coverage focused intensely on stock movements and investment recommendations—matched only by India’s market in this regard.

Another key factor in the irrationality of the stock market is the ownership concentration, where 1% of the wealthiest Americans own over 50% of the U.S. stock market. While this provides a buffer against “free fall” scenarios during market downturns, it also means that the market can be influenced and kept on an upward trajectory, preserving the wealth of this elite group.

The Fat Cats

Renowned Fortune magazine analyst Irina Ivanova points out that much of the upward movement in the US stock market can be attributed to the influence of what she calls “fat cats”—large shareholders who can sway the market without clear or conventional reasons. She asserts that market moves in 2023 were largely driven by this group’s ability to steer the market.

This explains why the share of stock ownership held by the wealthiest 1% of Americans rose from 40% in 2002 to 54% in 2024, reflecting how crises like the global financial meltdown and the COVID-19 pandemic were used to further consolidate wealth in fewer hands.

In addition, trillion-dollar institutions such as major asset management firms, hedge funds, and pension funds also help reinforce this ownership concentration to maintain high market levels.

Tesla’s Model

One striking example of dramatic and arguably illogical stock fluctuations is electric vehicle maker Tesla. Between November 2021 and December 2022, Tesla’s stock plummeted 73% due to supply chain issues exacerbated by COVID-19, as well as investor concerns about Elon Musk’s divided attention—particularly due to his involvement with Twitter (now X).

Yet, from May 20, 2024, to May 20, 2025, Tesla’s stock skyrocketed 91%, even though its challenges have grown more severe and long-lasting than temporary supply issues.

These challenges include growing consumer hostility toward Musk—impacting Tesla’s brand and sales—acts of vandalism against its factories and showrooms, and intense competition from lower-cost Chinese manufacturers. Chinese automaker BYD recently became the top-selling EV brand in Europe, surpassing Tesla, and Tesla still produces a significant share of its vehicles and components in China.

Despite these hurdles, Tesla’s stock hit nearly $480 in December 2024, and its P/E ratio exceeded 200, settling at 187 by the third week of May 2025. This raises the question: is it realistic to expect Tesla’s revenues to double under such circumstances—if ever—to justify such valuations?

It’s also worth noting that Tesla’s shareholder structure reinforces the earlier points about concentrated ownership in the US stock market. As of the end of 2024, Elon Musk owns about 13% of Tesla, Vanguard holds about 7.6%, BlackRock holds 6.3%, State Street holds 3.5% - the four entities together control 30% of a company valued at $1.06 trillion as of May 20, 2025.

Due to the powerful influence of media (or propaganda), a lack of informed investors, and high ownership concentration, many view the US stock market as relatively “overinflated.”

This sentiment was famously echoed by former Federal Reserve Chairman Alan Greenspan, who coined the phrase “irrational exuberance” to describe the market—an issue that has grown even more pronounced in recent years.

Sources: Argaam, Fortune, Forbes, WSJ, WayCharts