Is the S&P 500 Overbought? Valuation Gaps, Summer Risks Fuel Caution — Evening Brief – 07.17.25 

With the S&P 500 and NASDAQ notching fresh all-time highs, many investors are asking: Is the market overbought, overvalued — or both? New data suggests the answer may be yes on both fronts, even as momentum stays strong for now. 

A key long-term valuation measure, the Cyclically Adjusted Price-to-Earnings (CAPE) ratio, recently hit 37.8, which is about 52% above its long-term average of 24.8 — flashing a warning that stocks could be priced for perfection. At the same time, the CBOE Volatility Index (VIX) has dropped to 15.78, its lowest level since February, indicating notable investor complacency despite lingering uncertainty around tariffs, monetary policy, and geopolitical frictions. 

This disconnect between robust index performance and shaky undercurrents has become more apparent under the hood. While the major benchmarks have surged, fewer than 50% of the stocks in the S&P 500 are in an uptrend, exposing a narrowing of breadth that leaves the market vulnerable to downside shocks. Meanwhile, the U.S. 30-year Treasury yield has jumped back above 5%, it’s highest since May, reflecting investor fears about tariff-driven inflation, persistent deficits, and the growing search for alternatives like gold and Bitcoin, now viewed as more attractive safe havens than long-dated Treasuries. 

The rapid, V-shaped recovery off the spring tariff tantrum has so far shown no signs of giving back gains, suggesting that a good deal of optimism about corporate earnings, future Fed rate cuts, and a resilient consumer is already “priced in.” Recent positioning shifts amplify that concern: after being severely underweight equities in May, institutional fund managers have ramped up U.S. stock allocations significantly. Combined with retail “FOMO,” a squeeze on large short positions, and heavy flows into a handful of mega-cap AI leaders, this has fueled new highs — but without broad-based strength. 

History also adds a seasonal caution flag. The August–September stretch has been notoriously volatile for U.S. stocks. As the market exits what could be a strong earnings season and digests a flurry of expected trade deals and dovish Fed signals, any vacuum in fresh catalysts may leave equities exposed to a correction — and that’s if all else stays calm. 

If the rally stalls around current levels, technical signals and seasonal patterns suggest the market could be primed for a healthy correction — but most likely it is a potential entry point rather than a reason to abandon the bull case entirely. Investors should watch for signs of earnings disappointments, weaker consumers, or stickier inflation as the next catalysts for a reset.