Is the Stock Market Overvalued? Traders Express Growing Concerns

Rising Concerns Over Market Froth and Overvaluation

Traders are increasingly worried about market froth and stock overvaluation as they navigate headlines related to tariffs and peak corporate profit margins. A recent survey conducted by Charles Schwab between January 8 and January 17, polling 1,040 active traders, found that two out of three participants believe the stock market is currently overvalued.

Megacap Tech and AI Stocks: The Most Crowded Trades

The survey highlights that traders view megacap technology and artificial intelligence (AI) stocks as some of the most crowded trades. James Kostulias, head of trading services at Charles Schwab, noted, “It’s clear that the majority of traders believe there’s some froth in the market but, on balance, they also feel like there’s still more room for the bulls to run.”

Sector Sentiment: Bullish on Energy and IT, Bearish on Real Estate

Traders remain bullish on sectors such as energy, information technology, finance, and utilities. However, they express bearish sentiment toward real estate, consumer discretionary, and healthcare stocks. This divergence in market sentiment suggests that while some industries continue to thrive, others are facing increasing investor skepticism.

Market Leaders Under Pressure

Concerns about stock valuations have begun to impact some of the market’s biggest names. Shares of Robinhood (HOOD) have plummeted over 25% in the past five trading sessions. Similarly, financial heavyweights like JPMorgan (JPM), Goldman Sachs (GS), and Palantir (PLTR) have underperformed the S&P 500 in the same period, with Palantir suffering a sharp 30% decline amid worries over insider stock selling.

The "Magnificent Seven" Struggle to Maintain Leadership

The highly regarded "Magnificent Seven" stocks—Meta (META), Amazon (AMZN), Google (GOOG), Apple (AAPL), Nvidia (NVDA), Microsoft (MSFT), and Tesla (TSLA)—have shown mixed results in 2025. While Meta has outperformed the S&P 500 with a 12% gain year to date, other tech giants have struggled. Nvidia, often seen as the leader of the AI-driven market rally, has declined by 5% year to date, facing selling pressure ahead of its earnings report. Tesla has been hit the hardest, with its stock down 25% since the start of the year.

Jeff Jacobson, strategist at 22V Research, noted, “If the largest, best-performing names have lost their market leadership for now, it may be hard for the indices to make new meaningful highs in the short term.” Over the past month, major indices such as the Nasdaq Composite (^IXIC), Dow Jones Industrial Average (^DJI), and S&P 500 (^GSPC) have all traded slightly lower.

Cautious Optimism Amid Market Headwinds

Despite concerns about overvaluation, the overall stock market uptrend remains intact, and recession risks are still perceived as relatively low. However, Truist’s co-chief investment officer Keith Lerner recently downgraded his outlook on equities to Neutral. He cited modest deterioration in earnings, technical trends, and economic indicators as reasons for his more cautious stance.

Lerner stated, “The S&P 500’s forward earnings estimates, a key pillar of this bull market, have flatlined over the past month. While this may only be a temporary pause, this moderation in earnings estimates is occurring at a time when the S&P 500 trades at the top-end of its valuation range.”

In response to these shifts, Lerner adjusted his asset allocation strategy by downgrading small-cap stocks while increasing his cash holdings to a Neutral rating.

Conclusion: A Mixed Outlook for Stocks

While traders acknowledge signs of froth and overvaluation, many still see room for further gains. However, the underperformance of market leaders, growing concerns over valuations, and shifts in investor sentiment suggest increased volatility ahead. As the market navigates earnings reports and economic data releases, traders remain vigilant, balancing optimism with caution in an evolving financial landscape.