The stock market is entering ‘Crazy Town’ as valuations reach generational high, Stifel says

The stock market is “entering Crazy Town” as valuations creep toward generational highs, Stifel’s chief equity strategist Barry Bannister said on Thursday.

His comments come a day after the stock market soared to record highs following Donald Trump’s election win, with the Dow Jones surging more than 1,500 points and the Nasdaq gaining nearly 3%.

Bannister said current market valuations are pricing in an incredibly optimistic scenario that could lead to disappointment for investors.

“Even allowing for the best-case scenario of a U.S. soft landing, and despite a potential ramp higher for U.S. fiscal spending, as well as China global cyclical stimulus and lastly a geopolitical ‘reckoning’, the S&P 500 is a mania, nearing a 3-generation valuation high,” Bannister said.

Bannister added that while he expects the S&P 500 to reach “the low-6,000s” in the short term, such a move higher would result in valuations hitting 80-year highs, as measured by the cyclically adjusted S&P 500 CAPE earnings yield.

“The Earnings Yield (EPS/Price) is near the 3% low for the entire post-WW2 (since 1945) 3-generation period,” Bannister said.

According to Bannister, the extreme overvaluation suggests that even if the S&P 500 continues to rise a few percentage points to the low 6,000s in the short term, it is ripe for a 1,000-point decline, or about 13%, within a year or so.

“If S&P 500 tracks a century of manias it pops to low-6,000s in 4Q24 then round-trips to ~5,250 fair value” by early 2026, Bannister said.

The S&P 500 traded at 5,965 Thursday afternoon.

Ultimately, Bannister believes that current stock market sentiment is nearing the point that typically marks the end of a bull expansion. Quoting the famed British investor Sir John Templeton, he added:

“Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.”