Is It Time to Worry About a U.S. Equity Bubble?

How overvalued is the U.S. stock market right now? Are we nearing a bubble, or is there still room for more upside?It’s a trillion-dollar question — and while no one has the perfect answer, we can get closer to the truth by studying history.

Let’s start with the following chart, which shows the S&P 500’s cumulative returns over any two calendar years since 1990. The long bull market in U.S. equities is supported by data: over the past three decades, the S&P 500 posted positive two-year returns most of the time, with only four exceptions — the 2000 dot-com crash, the 2008 financial crisis, the 2020 pandemic, and the 2022 Fed rate hike shock. A negative two-year return typically requires a major external shock like a crisis or pandemic.

Since 1990, the S&P 500’s average two-year return has been 20.5%. If actual returns far exceed that level, it’s time to be cautious. From June 10, 2023, to June 2025, the S&P 500’s two-year return stands at 41%, exceeding the long-term average by more than one standard deviation. Market research firm Datatrek warns that because of these elevated returns, investors should temper expectations for the next two years.

Currently, Wall Street analysts estimate S&P 500 earnings at $264 per share this year and $300 next year. Datatrek uses this baseline to calculate the index’s fair value while also modeling scenarios with earnings cut by 10% to 30% to reflect risks like tariff uncertainty and earnings deterioration.

As shown in the chart, only the most optimistic scenario suggests the S&P 500 can rise from current levels this year. In most other cases, the index would end the year below today’s level. The outlook for 2026 is a bit more favorable, but still requires optimistic valuation assumptions to support further gains.

Over the past decade, the S&P 500’s valuation has ranged between 14x to 22x forward earnings. The current valuation sits at the upper end of that range, meaning investors should not expect multiple expansion to continue.

Now let’s look at the Nasdaq. From 1990 to now, its average two-year return is 29.2%, higher than the S&P, reflecting the market’s recognition of technology’s transformative power. However, when the Nasdaq falls, the declines are often sharper than the S&P’s.

From June 10, 2023, to June 2025, the Nasdaq’s two-year return is 48.5%, above average but not alarmingly high — not even one standard deviation above. Datatrek believes the Nasdaq is not in bubble territory yet.

Here’s an interesting aside: a Datatrek researcher read OpenAI CEO Sam Altman’s new article, The Mild Singularity, and concluded that in the AI era, the only clear winners in the stock market are the companies building AI. Tech firms are best positioned to harness AI for productivity gains. For non-tech sectors, it’s nearly impossible to forecast winners and losers over the next decade. All this reinforces Datatrek’s long-term bullish stance on U.S. megacap tech stocks. For everyday investors, owning these companies may be the only way to keep up with the AI wave. Since these firms are concentrated in the Nasdaq, investors should give the Nasdaq more valuation leeway.

So, when should investors be truly worried that the market is in a serious bubble?

Datatrek proposes a simple rule: if U.S. stocks double in two years — whether the S&P or the Nasdaq — it’s time for extreme caution. A two-year return above 100% means the market is two standard deviations above long-term norms. Since 1990, this has only happened four times: in 2000, 2011, 2021, and 2022. We all know what followed 2000 and 2022. As for 2011 and 2021, the strong post-doubling rallies were partly due to extremely low starting points following the 2008 financial crisis and the 2020 pandemic crash.

What about the other major U.S. indices — the Dow Jones Industrial Average and the Russell 2000? These have lower visibility and generally weaker long-term returns compared to the S&P and Nasdaq. Still, let’s briefly look at the Russell 2000.

Since 1990, the Russell 2000’s average two-year return has been 18.4%, and it has had more frequent negative return periods than the S&P and Nasdaq. Unlike the S&P’s large-cap companies, the Russell 2000 consists of small-cap firms with weaker profitability and lower resilience, explaining its lower long-term returns and steeper downturns. Datatrek believes that U.S. small caps offer only tactical trading value — long-term holdings should remain focused on the S&P and Nasdaq.