Key Takeaways
- US equities—especially tech stocks—have climbed since April despite headwinds from trade policy, a cooling jobs market, and stretched valuations.
- An eyewatering surge in artificial intelligence stocks has drawn comparisons with the tech bubble of the late 1990s and left investors wondering whether the market is vulnerable to a pullback.
- Strategists say that while market fundamentals still look solid, investors should avoid getting swept away.
Can anything stop this stock market?
Even in the face of an ongoing trade war, stretched valuations, worries about an AI bubble, a cooling job market, and a government shutdown, stocks have spent the better part of 2025 chasing new highs. The Morningstar US Market Index is up 35% since bottoming out in April and 15% over the past year.
“With each passing day, week, and month, we continue to push the envelope,” says Steve Sosnick, chief strategist at Interactive Brokers. “And to be fair, it’s worked.” Tech stocks are surging higher amid insatiable investor demand for AI, and so far, new tariffs have failed to make a meaningful dent in the earnings of US companies.
But the past few weeks have revealed some pockets of softness under the surface. Early this month, a social media post by President Donald Trump appeared to inflame trade tensions with China and sent stocks plummeting nearly 3% in a single day, while cryptocurrency markets plunged. The next week, fraud issues and bad loans disclosed in a handful of reports triggered a swift selloff in that sector. This past week, gold saw its biggest one-day drop in a decade.
Stocks are still bouncing back quickly after one-day drops, but the market has stayed essentially flat since the start of October.
That’s left some investors wondering how long the party can continue. “If the equity market does tank in the near future, I think you could definitely go back to these events and say, ‘of course the writing was on the wall,’” says Phil Segner, a portfolio manager at the Minneapolis-based Leuthold Group. “Hindsight is always 20/20.”
Are Investors Taking Too Much Risk?
Adding fuel to the fire are worries that investors are taking on risk beyond what the market’s fundamentals can support. Sosnick of Interactive Brokers characterizes today’s stock market as one where “the equilibrium between risk and reward seems to have shifted dramatically.”
He’s seen investors chase dips and momentum-based plays in the technology and AI sectors, which trade at a high premium, and points out that many of the most actively traded stocks on Interactive Brokers’ platform can be considered “thematic” trades related to those sectors. Investors’ willingness to chase those names higher is fueling comparisons with the tech bubble of the late 1990s.
Lisa Shalett, chief investment officer for Morgan Stanley’s Wealth Management division, sees the recent outperformance of both small-cap stocks and unprofitable tech stocks as a sign that some investors are positioning themselves for a strong economic reacceleration—an outcome that’s far from guaranteed. “While the bull case is potentially potent, we are not convinced that the rising tide will sufficiently lift all boats,” she wrote in a note to clients this week.
“The thing I fear most is the lack of fear,” Sosnick says. It’s not a given that the Federal Reserve will engineer a soft landing for the economy, and bad news is not necessarily a buying opportunity. “The market assumes that everything is going to come up the way it hopes—you can’t assume that,” he says.
Yellow Flags, for Now
On a larger scale, the stock market’s record-breaking run over the past six months has raised questions about what Wall Street calls “irrational exuberance”—a scenario where investors’ enthusiasm drives stock prices much higher than what they’re fundamentally worth. It’s a situation where gains beget more gains, and investors pile into risky trades seemingly indiscriminately.
But for now, strategists aren’t yet sounding the alarm that the market looks overly frothy, or that a major downturn is around the corner. Sosnick of Interactive Brokers describes stretched valuations, crowded tech sector trades, and the market’s recent momentum as yellow flags rather than red ones. He sees more evidence of red flags among active traders chasing rallies rather than buy-and-hold investors.
Jurrien Timmer, director of global macro at Fidelity Investments, says the landscape for equities still looks sound thanks to solid earnings results. “Some froth is definitely coming into the market, but … we’re not in a danger zone,” he recently told Morningstar. He says there’s more momentum left in the market, at least for now.
Mike Reynolds, vice president of investment strategy at Glenmede, shares that view. There aren’t yet signs that the market is approaching extreme or overbought conditions yet, he says. Valuations may be elevated, but “comparisons to the peak of the tech bubble are certainly premature.” He’s upbeat on the economy overall.
Meanwhile, Segner of the Leuthold Group says he’s not yet seeing signs of a traditional market top. The majority of a group of eight bellwether equity indexes his firm tracks have made new highs in the past month, for instance. If stocks were on the precipice of a downturn, it might be only the S&P 500 index consistently climbing to new records.
Healthy Recalibration or Reason for Caution?
Of course, investors don’t yet have the benefit of hindsight when it comes to today’s stock market. Those few shaky days in October may be symptoms of systemic weakness, but they may just as well be a “pause in markets that have been nothing but vertical,” Segner says. Reynolds of Glenmede sees those one-day slides as “a reminder for investors not to get overly complacent. There are things—like the outstanding tariffs issue—that aren’t completely settled.”
And amid the ongoing tech frenzy, there are also signs that some investors are preparing for a changing tide.
Segner of the Leuthold Group points to a recent change in leadership between cyclical and defensive stocks as a “sign of caution in the market.” Where cyclical sectors like technology, consumer discretionary, and energy surged when the market began its recovery in April, the past month has seen defensive sectors like healthcare and utilities take the lead.
Investors often turn to defensive stocks when they are concerned about a slowing economy or looking to trim risk from their portfolios, since those sectors are less sensitive to fluctuations in the outlook and tend to be more stable during downturns.
Bottom Line for Investors
It’s never easy for investors to draw the line between taking advantage of opportunities in a bull market and managing the downside risks that accompany those opportunities, and today’s equity market is no exception.
For Sosnick, “the biggest risk would be succumbing to FOMO,” an acronym that refers to the “fear of missing out,” by chasing fleeting rallies higher rather than sticking to a disciplined investment strategy. Shalett of Morgan Stanley Wealth Management echoes that view: “Despite the allure of momentum, now is not the time to lean into speculation and low quality,” she wrote in a recent note to clients.
Reynolds of Glenmede says he’s aiming for a neutral risk profile to strike a healthy balance. “Overall, investors shouldn’t be taking too much risk, but also enough risk to participate in the ongoing bull market,” he says. He’s “exercising caution” in parts of the market that look overbought and overvalued, like mega-cap tech, and instead looking to small-cap stocks and value stocks, where investors may see tailwinds from both valuation expansion and earnings growth in the months ahead.
Segner of the Leuthold Group says his firm has recently trimmed the equity exposure in its core fund. “We’re still out there dancing, but we’re dancing a little closer to the exit,” he says.
