S&P 500's 6-Day Winning Streak: A Tactical Entry Signal or a Bubble Warning?

The S&P 500's recent 6-day winning streak has reignited a familiar debate: is this a sign of sustained momentum or a warning of overvaluation? To answer, we must dissect the interplay between technical momentum indicators and fundamental valuation metrics. The data paints a complex picture, one that reflects both the resilience of corporate earnings and the growing risks of a market stretched to historical extremes.

Valuation Metrics: A Tale of Two Narratives

The S&P 500's trailing price-to-earnings (P/E) ratio of 27.45 as of September 2025, according to StreetStats, exceeds its 5-year average of 22.17 and 10-year average of 19.18 by more than one standard deviation, per World P/E Ratio. Some sources even report a P/E of 30.09, as reported by Fortune, a level last seen during the dot-com bubble. Similarly, the price-to-book (P/B) ratio of 4.688–5.46, according to GuruFocus, far outstrips its long-term average of 3.75, per YCharts. These metrics suggest a market pricing in optimism that may not be fully justified by fundamentals.

Yet earnings growth remains robust. The index's forward 12-month earnings per share (EPS) are projected to grow by 13.6% in 2026, according to Carson Group, and 80% of S&P 500 companies exceeded their EPS estimates in Q2 2025, per RoanCP's report on Q2 performance (https://roancp.com/sp-500-q2-2025-earnings-report-performance-and-expectations/). While sectors like Energy and Materials lagged (with Energy's earnings down 25% YoY, per RoanCP), the broader market's profitability story persists. This duality-overvalued metrics coexisting with strong earnings-creates a paradox for investors.

Momentum Indicators: Overbought or Overextended?

Technical indicators reinforce concerns about overvaluation. The S&P 500's 14-day RSI of 69.2, according to Aiolux, hovers near the overbought threshold of 70, while bearish divergence in the RSI suggests weakening momentum, as flagged by StockCharts. The MACD, though still positive, is flattening, a classic sign of waning bullish momentum, per PortfolioAI. Meanwhile, the 50-day and 200-day moving averages (6,384.89 and 5,984.93, respectively, per Wall Street Numbers) remain at all-time highs, reflecting a market in a strong uptrend.

This tension between technical strength and overbought conditions is emblematic of late-cycle dynamics. Historically, such conditions often precede corrections, particularly when investor sentiment becomes exuberant. The current environment mirrors 2000 and 2007, periods when momentum outpaced fundamentals, as noted by PortfolioAI.

Historical backtesting from 2022 to 2025 reveals that when the S&P 500's RSI reached overbought levels, the average cumulative return was slightly negative in the first two weeks, with statistically significant underperformance on days 6–11 and 17–22. Beyond 20 trading days, the effect diminishes, suggesting short-lived mean reversion, according to the same PortfolioAI analysis.

The Sustainability Question

The critical question is whether the S&P 500's valuation can be justified by future earnings growth. A P/E of 30 implies that investors expect earnings to grow significantly faster than historical trends. While 2026's 13.6% EPS growth forecast, per Carson Group, is encouraging, it must accelerate further to sustain current valuations. If earnings growth slows-as it did in Q2, when year-over-year growth fell to 6.4%, according to RoanCP-the market risks a re-rating downward.

Moreover, the narrowing of market breadth-a phenomenon where gains are concentrated in a few sectors or stocks-adds fragility. The underperformance of Energy and Materials, as RoanCP highlights, underscores structural imbalances, suggesting that the current rally may not be broad-based.

Strategic Implications for Investors

For tactical investors, the 6-day winning streak may offer entry points, but only with caution. A disciplined approach would involve:1. Position Sizing: Reducing exposure to overvalued segments (e.g., high P/B stocks) and increasing allocations to undervalued sectors.2. Hedging: Using options or diversification to mitigate downside risk in a potential correction.3. Time Horizon: Recognizing that long-term investors may tolerate current valuations if earnings growth justifies them, while shorter-term traders face higher volatility risks.

Conclusion

The S&P 500's 6-day winning streak is a double-edged sword. While it reflects enduring confidence in corporate profitability, the valuation metrics and technical indicators signal a market at a crossroads. Investors must weigh the allure of continued gains against the risks of a correction. As history shows, markets often correct when momentum and fundamentals diverge-and the current data suggests such a divergence is emerging.