Scott’s Take: Is the Stock Market Overvalued in 2025?

Just as a good or service can be considered overpriced when it’s being sold above its average market value, a stock can be overvalued when its market price exceeds its intrinsic value. Is the stock market overvalued in 2025? Scott MacKenzie, MBA, a Certified Financial Planner®, Certified Investment Management Analyst, and founder of wealth management firm PFW Advisors shares his expert insights. 

Understanding the market’s current valuation and knowing how market value is calculated can help you make more informed and rational decisions about your investment portfolio and set yourself on the path to financial freedom. 

Understanding Stock Valuation

The stock market is a discounting method. Current valuations and stock prices reflect expectations of future income streams and discounted cash flows. It is very important to understand this — the current value of an asset is determined by its anticipated future worth. However, the market value of a stock may not always be justified by its earnings outlook. 

-Scott MacKenzie

What Factors Influence Stock Market Valuation?

A stock’s value is determined first and foremost by math; specifically, by calculating the potential return it may provide its investors. The answers to the following questions in regard to any particular stock will determine its intrinsic value:

• How likely is it that a stock will make more money in the future than it does today?
• How will the money be returned to shareholders?

There are multiple ways capital can be returned to shareholders, such as reducing expenses, growing sales, paying dividends, and more. While different models will come up with different outcomes for a company’s valuation, it always goes back to the math, including the current cost and future expectations of capital.

The second part of the way stocks are valued is based on how much value and confidence people place on expectations of future cash flows. Investors’ confidence is reflected in the multiples they place on companies and the market. Factors such as the economy, politics, and interest rates all affect investors’ sentiments about the market.

Is The Market Overvalued In 2025?

For most of the last 4 years of the 1990s, the valuation and the yearly increase of the stock market left many financial experts scratching their heads. In 1996, the Federal Reserve chairman famously said that we were experiencing “irrational exuberance.” Most of the market continued to rise meteorically for another 4 years. A significant contributor to this boom was the high level of confidence investors had in the future value of the market, especially stocks related to the Internet or “dot-com” companies.

It makes sense that the market is so influenced by people’s sentiments. People buy stocks and invest in stock funds. The balance between buyers and sellers is what creates the equilibrium that is reflected in current stock prices. Additionally, the US economy is about 75% consumer-driven.

That gets me to the point I am trying to answer: Is the market overvalued now? By definition, it is not. It is currently at the equilibrium between buyers’ demand for stocks and sellers’ desire to sell. Investors are buying and selling at a reasonably balanced rate; enough to maintain demand, but not enough to drive up prices to an unprecedented level. This signifies that investors generally don’t consider the market to be overvalued at this point in time—buyers feel stock prices are justified enough to continue to purchase at the current rate, and sellers generally feel they are getting their money’s worth. However, it’s always important to keep in mind that investors’ current sentiment has little to do with a stock’s long-term price point; sentiment can fluctuate quickly, causing potentially major shifts in the market in the blink of an eye.

For more insight into the current state of the market, let’s turn to the data analysis of Ashwath Damordaran, professor of finance at the Stern School of Business at New York University and a leading expert of market valuation. I was introduced to the work of Professor Damordaran by my finance professor at Emory Shehzad Mian. Much of his work is openly published. His recent article, The Party Continues for US Equities, is excellent reading if you, like me, think finance is the most amazing topic ever invented.

Per Professor Damoradaran, there is a lot of uncertainty in the current market, but what the raw data tells us from a statistical standpoint based on current valuations and history is that there is an 80% chance that the market is overvalued. 

One of the things that I love about Professor Damoradaran is that he tells a story with the numbers and just reports the facts, rather than making a definitive statement about what the future holds. In his conclusion, he admits that he can see both a path to higher stock prices or lower. 

From my perspective, I also can see a path to either outcome. But in terms of financial planning and investment strategies, in this current climate, I’m being more cautious about how far out on the risk continuum I’m willing to move. Why? Because valuation doesn’t matter until it does. Not all signals are green; just because some stocks are high-value now doesn’t mean they always will be. High stock prices may not always be justified by the market either, meaning it will correct itself sooner or later. 

Since stocks in certain markets, such as technology, have been outperforming other sectors significantly in recent history, you may find your portfolio has ended up heavily weighted towards tech stocks. Though it seems like a good strategy to skew your allocations towards the strongest markets — and to an extent it is — I’d encourage investors not to put all their eggs in one basket.

Effectively Plan Your Asset Allocation In 2025

As Scott pointed out, the trajectory of the current market may not be entirely predictable due to economic and societal fluctuations. So how can you balance your risk tolerance with wealth preservation in a volatile market?

Every individual’s financial situation is unique, so it’s important to adopt an approach to your asset allocation that’s tailored to your wants, needs, and goals. To help develop a measured, balanced financial plan that will help you grow your wealth while keeping your assets safe during market fluctuations, reach out to PFW Advisors today.

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