Thread by @_Investinq

🚨 U.S. stocks are now more expensive than nearly any time in modern history.

But here’s the real problem: U.S. households are holding more stocks than ever before.

This combo is rare and risky.

(a thread)

Start with valuations. The Price-to-Earnings (P/E) ratio tells us how much investors are paying for every $1 of expected profit.

Right now, the S&P 500 trades at 21× forward earnings.

That means investors are paying $21 for $1 of next year’s expected earnings. The 25-year average is closer to 16×.

The Nasdaq 100, dominated by Big Tech is even more stretched at ~26× forward P/E.

Historically, when investors pay this much for future profits, returns over the next 5–10 years tend to disappoint.

This isn’t just expensive, it’s top 5% expensive in history.

If we zoom out, it looks worse.

The Shiller CAPE ratio (Cyclically Adjusted P/E) which averages profits over 10 years to smooth out booms and busts is at ~35.6.

That’s nearly double its 100-year average (~17).

Only three periods had higher CAPEs: 1929, 2000, 2021. All three ended in crashes.

Valuations this high tend to compress future returns. Why?

Because the price you're paying is already baking in a perfect future: low inflation, high earnings, and low interest rates.

Any disappointment, recession, Fed error, earnings miss and the floor gives out.

But here’s the twist: It’s not just about expensive stocks.

It’s who is holding them. U.S. households now allocate ~43.4% of their financial assets to equities.

At the 2000 dot-com peak? That number was 38.4%. This is the highest household equity exposure in recorded U.S. history.

That makes the system fragile. When stocks are this expensive and owned this broadly, even a moderate drop affects:

• Consumer confidence
• Spending behavior
• Wealth inequality
• Retirement timelines
• Political sentiment

It’s a feedback loop.

To make matters worse, households are not just long , they’re leveraged.

Margin debt (money borrowed to buy stocks) is near $937 billion, up 33% YoY.

Mutual fund cash holdings, the dry powder that protects portfolios are near record lows. This is a market priced for perfection with no parachute.

Meanwhile, personal savings rates are around 3–4%, far below the 50-year average of ~7%.

Consumers are spending based on wealth effects, not income. The wealth effect is when rising asset prices (stocks, homes) make people feel richer, so they spend more.

But it's paper wealth. Not cash.

BNP Paribas estimates the 2024 wealth effect boosted consumer spending by $246 billion. This has helped keep GDP growth positive, even with tight monetary policy.

But it’s a mirage if stocks fall, spending falls with it.

The consumer is propped up by valuations.

Now enter the Fed. With inflation easing, markets expect rate cuts but the Fed faces a dilemma:

• Lower rates help growth and stocks
•  But lower rates also reinflate the very bubbles they’re trying to avoid

It’s the 1998–2000 problem all over again.

On paper, stocks still look attractive vs. bonds. That’s the Fed Model: it compares the earnings yield of the S&P 500 to Treasury yields.

Right now:
• S&P 500 earnings yield ≈ 4.8%
• 10-year Treasury yield ≈ 4.5%

So why not prefer stocks? Because stocks carry much more risk

The Equity Risk Premium (ERP), the extra return investors demand to own stocks over safe bonds is now just ~2.5%, well below the historical average of 4–5%.

Per valuation expert Aswath Damodaran, stocks are only worth these prices if you're willing to accept lower future returns.

Goldman Sachs puts the 10-year forward S&P 500 return at ~4.8% annually (nominal).

Ned Davis Research sees a similar path: below-average returns for a decade unless earnings growth wildly exceeds expectations.

And most of that optimism is priced in already.

So where does that leave us?

• Stocks near all-time highs
•  Valuations among the most extreme ever recorded
• Households maxed out on equities
• Savings rates low
• Margin debt rising
•  Fed boxed in
•  Bond returns competitive

It’s a fragile equilibrium.

Does this mean stocks will crash tomorrow? No ,but it does mean the margin of safety is gone.

When everyone is in, there's no one left to buy only to sell.

And when you mix extreme valuations with record exposure, small shocks become avalanches.

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retail is holding everything up!

https://x.com/_investinq/status/1924253203450700256?s=46