Why investors don’t need to be nervous about a stretched stock market in 2025: Strategist

New York: Investors are feeling a bit jittery about the stock market being overvalued. But according to a ProShares analyst, there’s less to worry about than it seems. He pointed out that the market has way less leverage now compared to 20 years ago.

While big tech stocks have pushed the S&P 500 to new heights, some folks think the market is way overpriced. But this strategist, Simeon Hyman, suggests that this concern might be overblown. He mentioned on Bloomberg TV that the current leverage levels are much lower than they were two decades ago.

Sure, stocks are pricey right now. Typically, you’d see a price-to-earnings ratio between 18x to 20x, but it’s sitting around 25x these days. Other signs also show that market valuations are at historical highs.

Despite these high valuations, Hyman believes that the low levels of market debt can actually reduce the risks tied to those elevated P/E ratios. The S&P 500’s net debt to EBITDA has dropped from 5x to just 1x compared to 20 years ago.

He also noted that today’s stocks are generating solid returns from their assets rather than relying on debt. This shows that companies are profitable, which is a good sign. Hyman argues that the drop in leverage and the strong profitability, especially in tech, might make some of the current market excitement reasonable.

Still, many investors are feeling uneasy this year, and even big names like David Einhorn are taking notice. He recently warned that traders are driving the market to its highest levels in decades.

That said, most analysts agree that it’s not a bubble, and staying invested in the U.S. market is still a good idea. However, there are growing calls for a market correction, especially if the top tech stocks start to lose their recent gains.

With so much focus on these mega-cap companies, a miss in earnings in 2025 could really shake things up. So, experts suggest that investors should think about diversifying their portfolios next year, even if tech continues to thrive.

Even if a correction doesn’t happen, traders might want to prepare for lower returns if the momentum of the top seven tech stocks slows down. Generally, Wall Street is optimistic, expecting the S&P 500 to keep rising, with a year-end target around 6,539.