- The S&P 500 is trading at elevated levels, with the CAPE ratio near historic highs
- Semiconductor stocks are seeing record inflows, suggesting potential overextension
- Mixed signals: early warning indicators are improving, but valuations remain stretched
Strong markets, but are valuations flashing warning signs?
In this week’s Markets in Motion, Bruce Campbell highlights the CAPE ratio, a long-term valuation metric that compares price to earnings. Currently sitting around 38, well above the historical average of 17, it suggests markets are trading at elevated levels. Historically, periods like this have been followed by more modest forward returns, often in the mid-single digits.
At the same time, capital is continuing to flow aggressively into technology — particularly semiconductors. The SMH Semiconductor ETF is already seeing record quarterly inflows, a sign of strong demand but also a potential signal that the sector may be getting crowded.
Looking at sector rotation, technology remains the clear leader, while energy is beginning to lose relative strength. Financials have shown signs of improvement but appear to be consolidating for now.
There is, however, a more constructive signal emerging. Campbell’s early warning indicator, which turned negative earlier this year, is now close to flipping back to positive — suggesting markets may still have room to run.
The takeaway: markets remain strong, but with valuations stretched and positioning crowded in key areas, a more active and selective approach may be needed.
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