Are High Valuations the “New Normal” for U.S. Stocks?

The S&P 500 is sitting near record highs again, and one topic keeps resurfacing: valuations. At around 22.8 times forward earnings, the index is trading just under the 25.0 peak reached before the dot-com bubble burst. That comparison alone is enough to make investors nervous. Yet Wall Street strategists aren’t necessarily sounding alarm bells this time. Instead, many are rethinking what “normal” really means in today’s market.

The Case for a “New Normal”

Bank of America strategist Savita Subramanian recently argued that maybe we shouldn’t expect valuations to revert to historical averages. Instead, today’s multiples might simply reflect a structural shift in markets, powered by AI adoption, strong corporate earnings, and the dominance of mega-cap tech.

Sam Stovall at CFRA Research put it another way: when compared to long-term history, valuations do look high. But if you zoom in on the past five years—a period defined by robust fundamentals and large-cap leadership—the numbers look much more reasonable. In fact, the S&P has traded at a premium of about 40% to its long-term average for the past two decades. From that perspective, “expensive” has been the baseline for a while now.

This shift in thinking reflects how markets evolve. In a world where technology giants command both market cap and profit growth, it makes sense that investors are willing to pay more for earnings that appear sustainable.

Lessons From History

Not everyone is convinced, though. Fed Chair Jerome Powell acknowledged last week that valuations look “quite high,” a statement that instantly drew comparisons to Alan Greenspan’s famous “irrational exuberance” speech in 1996. That remark came more than three years before the dot-com crash—during which time the Nasdaq quintupled.

That historical parallel carries two lessons. First, markets can stay expensive much longer than skeptics expect. Second, trying to time the exact peak often proves costly. As Barry Ritholtz noted, sitting on the sidelines in the late ’90s meant missing out on enormous gains, even if the eventual crash validated the bubble thesis.

Earnings Still Hold the Key

So what’s different today? Analysts like Ed Yardeni argue that earnings growth is still largely keeping up with prices. Companies are delivering results that justify higher multiples, and expectations for Q3 earnings point to fresh records. If profits continue to climb, valuations that look stretched now could normalize over time.

Goldman Sachs adds another layer: the real risk might not be a crash, but a melt-up. Strong GDP growth, resilient consumer spending, and trillions of dollars in sidelined cash are all supportive factors. Combine that with Fed rate cuts broadening market participation, and you have the ingredients for a wave of buying that pushes valuations even higher.

Pullbacks vs. Crashes

Of course, no rally is smooth. Gene Goldman at Cetera Financial points out that corrections of 3–5% are both possible and healthy. But in his view, these dips are buying opportunities, not precursors to a crash. The consensus across much of Wall Street is that unless the U.S. heads into recession—a scenario few see on the immediate horizon—it’s hard to justify a bearish outlook.

My Take

To me, this market doesn’t feel like the late ’90s. Back then, profits didn’t back up sky-high valuations. Today, we’re looking at record earnings, transformative AI adoption, and market leadership concentrated in companies with real cash flow. That doesn’t mean stocks will only go up—corrections are inevitable—but it does suggest that high valuations might be less of a warning sign and more of a reflection of how the market is structured today.

In other words, “expensive” may simply be the new normal.