The current U.S. stock market continues to rise driven by the AI wave, but high valuations and a historically rare Shiller CAPE ratio suggest potential risks. The market has already shown cautious signs of rotation from growth stocks to defensive sectors. However, long-term historical data support the strategy of “buy and hold” quality stocks, as even after severe plunges, major indices eventually recover and grow. Investors should focus on selecting and holding for the long term companies with sustainable competitive advantages, rather than attempting to time the market.
The current market environment exhibits significant structural characteristics. Over the past several years, artificial intelligence-related stocks have been the primary driver of the bull market, with the three major benchmarks—the S&P 500, the Nasdaq Composite, and the Dow Jones Industrial Average—all posting double-digit gains, and the Dow closed above 53,000 points for the first time this week. Investors generally believe that AI technology will enhance corporate operational efficiency and innovation capabilities over the long term, thereby boosting earnings, and they continue to buy shares of core companies in this sector.
However, the market’s ascent has not been without volatility. Since the end of last year, concerns over valuations of AI stocks have triggered notable price fluctuations on multiple occasions, and investors have also questioned whether massive AI capital expenditures by technology firms can generate reasonable returns. Entering this year, some funds have rotated out of large-cap AI concept stocks and into healthcare stocks, which are perceived as defensive sectors due to the relatively inelastic demand in that industry. In the first half of the year, major healthcare companies Johnson & Johnson, UnitedHealth Group, and Eli Lilly all posted double-digit gains. At the same time, growth stocks, particularly AI-related names, continued their strong upward momentum, with memory chip companies Sandisk and Micron Technology ranking as the top two performers in the S&P 500 in the first half, posting gains of over 600% and 200%, respectively. Despite persistent concerns, robust corporate earnings and sustained expectations of high demand continue to underpin share prices.
From a valuation perspective, the overall U.S. stock market is currently in expensive territory. The Shiller CAPE ratio (cyclically adjusted price-to-earnings ratio), which measures the market’s long-term valuation, has only been at its current level once in the past—during the dot-com bubble era. This indicator, calculated based on ten-year inflation-adjusted average earnings, is regarded as a relatively accurate price assessment tool. The current high reading signals historic overvaluation, and historically, such levels have often been followed by subsequent market declines.
Whether a market correction or crash occurs in the near term or further in the future, such cycles are a normal part of investing. In facing the current environment, the answer given by historical experience is straightforward and certain: stick with quality stocks during periods of market turbulence and take a long-term view. The historical trajectory of the S&P 500 repeatedly demonstrates that after every market crash, the index has fully recovered and reached new highs. Therefore, the viable strategy for investors at present is to select high-quality names with solid fundamentals and long-term conviction, and to commit to holding them for the long haul. History clearly shows that this approach is the core essence of navigating market cycles and ultimately achieving investment success.
