We're Not Headed for a Market Meltdown

Today's valuations are 'worrisome'... but not irrational...

That's the latest message from famed investor Howard Marks.

Marks made waves back in January, when he argued the market wasn't in bubble territory. It was a bold call... especially at a time when inflation, interest rates, and geopolitical uncertainty had many investors fearing the worst.

We echoed Marks' sentiment at the time. Bubbles usually require a clear catalyst to burst. And there wasn't one in sight.

Since then, the market has come roaring back. The S&P 500 has climbed more than 10% year to date. It's up 31% from its springtime lows.

Economic data has improved. And the mood on Wall Street has shifted from anxious to euphoric.

But now, Marks is sounding a more nuanced note. In his latest memo, "The Calculus of Value" he admits valuations are lofty. He even calls them "worrisome."

Still, he stops short of a full-blown warning.

That's because the market's biggest winners may actually deserve their sky-high multiples.

The 'Magnificent Seven' are still carrying the rally...

And they're not slowing down.

More than half of the S&P 500's 58% total return over 2023 and 2024 came from just those seven stocks. Together, they now make up about a third of the entire S&P 500's market value.

That kind of concentration is rare and often concerning. But Marks takes a more measured view. He doesn't dismiss the rally as hype.

Instead, he points out that these companies are thriving in ways the broader market isn't.

The Mag Seven boast dominant market positions, large competitive moats, and nearly infinite pricing power. They're also at the heart of the AI revolution.

That explains their average price-to-earnings (P/E) ratio of 33. It's well above the mid-to-high teens historical average... but Marks argues it might be warranted, given their advantages and long growth runways.

The other 493 companies in the S&P 500 trade at an average P/E ratio of 22. That's still elevated. But it lacks the same underlying support from durable competitive advantages and secular growth.

In other words, the problem isn't that the whole market is overpriced. It's that a small group of companies do all the work... and most others are just riding their coattails.

Marks introduces a framework he calls INVESTCON 5. It's his version of a DEFCON-style scale for risk-taking. Right now, he places the market near a level that suggests rotating into more conservative holdings, like high-quality credit.

But even here, he makes an exception. He suggests that certain companies, especially AI-driven leaders, may still deserve a place in portfolios.

These aren't the speculative tech stocks of the past. They're cash-rich. They boast efficient operations. And they're resilient across economic cycles.

As Marks states, things might actually be different this time. That's not a prediction... It's a reminder to look deeper into the valuations (and the reasons behind them).

This market isn't cheap, but it's also not irrational...

Marks has built his career on identifying excess and "sounding the alarm" when investors get carried away.

So when even he says the top-performing companies may be worth their price tags, it's worth paying attention.

That doesn't mean the whole market is in the clear. Valuations are high across the board. The average stock may struggle to meet expectations.

But the real risk is assuming all high valuations are speculative.

This rally may look narrow... but it's powered by businesses that continue to earn their stripes.

Regards,

Joel Litman
September 12, 2025

P.S. We're fast approaching a critical market moment. And yet, very few people on "Main Street" know what's happening.

In short, a domino effect will soon be set in motion that could trigger lightning-fast price moves... in dozens of America's favorite companies.

I've been tracking the situation for months. And I believe it's time to move your money – before the window of opportunity snaps shut. Learn more here.