Let's address the elephant in the room that I keep hearing about....Am I worried we are in a stock market bubble?
Short answer...No. Are there certain stocks or assets classes that may be in bubble territory? Sure, maybe. But that is always the case! There are always certain stocks or areas of the market that are a little “frothy”…But looking at the entire market, or the S&P 500 overall, I don’t see it right now. And here is why…
Take a look at the chart below which shows us the growth of earnings, or EPS – Earnings Per Share, for the companies that compose the S&P 500 index vs the actual price performance of the S&P 500 index overall.
As I’ve said here a hundred times….Over the long term, prices tend to follow the trajectory of earnings, and you can see that clear as day in this chart. Prices and earnings are up almost an identical amount over the past 25 years. There are an endless list of things that can move the markets one way or another over the short term, but over the long term, PRICES FOLLOW EARNINGS. So the one data point we should really watch as long-term investors is earnings growth. And right now, earnings are growing at a strong clip.
In Q3 of 2025, earnings of the companies that make up the S&P 500 grew at about 13% year over year. And based on analysts predictions, I won't be surprised at all to see earnings growth exceed 10% again in Q4 once the reports have all been made public.
When would I start to get worried about a “bubble”? Well, if the dark blue line (price) in the chart above kept climbing higher while the light blue line (earnings) was flat or falling….I’d start to get a little concerned. If stocks go higher without confirmation from underlying earnings, that where "bubbles" start to form. But that is not at all the case right now. This chart shows us that the gains we have seen from the stock market are very well supported by the underlying earnings growth of the companies we are investing in.
And believe it or not, a lot of the big technology names that people like to tell us are in a bubble actually got cheaper over the last 12 months! The Nasdaq 100, an index of 100 of the largest technology companies, returned about 20% in 2025. But the underlying earnings of those companies is estimated to have grown at more than 25% during the same period...Translation....despite gaining 20% in 2025, the technology sector actually got cheaper last year. That is NOT what you see in a bubble.
Now, does any of this mean it's smooth sailing and more gains ahead in 2026? Of course not. Nobody knows for sure and there are no guarantees in the stock market. The occasional pullbacks or corrections are simply part of the game. On average the market drops by about 14% at some point each year, yet still manages to post gains more than 75% of the time. 2025 was a perfect example of this. We dropped about 20% in April and still managed to post strong gains for the year. Just remember these facts when the next pullback arrives. We've been through this many times before, and as long as we stayed patient and invested, our investments fully recovered and went on to make new gains.
If we come to terms with the inevitability of pullbacks and periodic bouts of pain, it's much easier to stay calm when they arrive. Personally, I go into each and every year expecting to see the market down 15% or so at some point because that is what the historical data shows me. With this mindset it's easier to navigate the volatility and avoid making rash decisions when things get dicey.
Stay patient. Stay invested. And ignore the short-term noise. This is a recipe for long-term success as an investor.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual.