The U.S. equity market is also highly valued by virtually any valuation metric including ratios for price-to-earnings (Figure 3), price-to-book (Figure 4) and price-to-sales (Figure 5). It seems the AI revolution is pushing valuations to levels last seen during the internet revolution of the 1990s, the electrification of the U.S. economy and the assembly-line manufacturing boom of the 1920s.

As we have seen in our previous paper on the sentiment gap between annual dividend index futures and the S&P 500, Russell 2000 and Nasdaq 100, equity prices have sharply diverged from both actual cash dividends and what future payouts are worth in net present value. 

All of this begs the question: how much longer can the bull market last? And, what signs should investors be looking for ahead of a possible peak and bear market?

Before we examine more quantitative indicators of possible market peaks, let’s begin by taking a quick look at when various bull markets in equities and various commodities (gold, silver, tulips, etc) hit their peaks including in 1929, 2000 and 2008. What’s interesting here is when these various markets peaked during their respective decades (Figure 6):

What’s curious about this is there are few examples of markets peaking mid-decade. Market peaks have tended to cluster around the end or occasionally the beginning of a decade. Could it be that investors tend to project whatever trend is afoot mid-decade out to infinity and only begin asking questions about the reasonableness of valuations as the decade draws to a close or a new one begins? 

Here are three indicators to watch for signs that we may be close to the top in U.S. equities – or maybe not close at all: 

1. Corporate profits: they often begin declining before peaks in the stock market.
2. Credit spreads: in the late 1990s and before the global financial crisis, they began widening before equities peaked.
3. Implied volatility on S&P 500 options: in the late 1990s and again in 2007, the VIX index entered into a period of higher highs and higher lows before stocks peaked.

Corporate profits peaked as a percentage of GDP in early 1997 and declined consistently through 1998, 1999 and early 2000. U.S. equities largely ignored these warnings, although they did become more prone to violent corrections on the way up. The S&P 500 finally peaked in 2000 before shedding nearly 50% of its value by late 2002.  

Likewise, corporate earnings peaked as a share of GDP in mid-2006 and declined for over a year before equities peaked in October 2007 (Figure 7). This time around, earnings continue to grow, suggesting that we might not be close to a peak. In fact, earnings expectations have been rising so rapidly in recent months that the S&P 500 forward price/earnings (P/E) ratio has been falling even as stocks continued to rally (Figure 8).

The difference here is that the Schiller CAPE (Cyclically Adjusted Price-to-Earnings) ratio looks backward over the past 10 years while the Bloomberg forward P/E ratio is based on analyst expectations for earnings.

The spread between high-yield corporate bonds and U.S. Treasuries widened before peaks in the equity market in 2000 and 2007. For example, during the 1990s, the bull market had two phases. From 1991 until late 1997, spreads generally narrowed until the Bloomberg U.S. Corporate High Yield OAS (Option-Adjusted Spread) was just 2.35% above U.S. Treasuries. The second phase of the bull market from late 1997 until the peak in 2000 saw equities rising even as credit spreads widened (Figure 9). 

Implied volatility on equity index options followed a similar pattern. Implied volatility generally fell from 1990, hitting bottom in 1996. Starting in late 1996, implied volatility began to rise. The S&P 500 continued its bull market run, but corrections became increasingly pronounced (Figure 10).

A similar pattern unfolded during the 2003-2007 bull market but in a much more compressed fashion. Credit spreads and implied volatility generally narrowed/fell from 2003 until January 2007 but then began widening/rising in February 2007 right up until the S&P 500 hit its high in October (Figures 11 and 12).

That high-yield bond spreads and equity index options track one another is not surprising. Under contingent claim analysis (a framework to value assets, liabilities etc as financial options), equity is a long call option on the asset value of a firm, while a corporate bond is akin to a risk-free Treasury paired with a short put option. When asset volatility rises, it inflates option values across the capital structure. In a late-stage bull market, this can create a temporary dislocation where equity prices melt upward alongside rising implied volatility (the long call effect), even as credit spreads begin to widen (the short put penalty). Eventually, however, this mounting volatility fractures broader investor confidence, helping to generate bear markets.

So how are things stacking up this time around? When it comes to credit spreads, they are about as narrow now as ever and have not yet shown any tendency towards widening (Figure 13). This suggests that we might be far from the equity market’s peak despite many measures of valuation looking stretched.

By contrast, implied volatility on S&P 500 index options hit its low in 2024 and has begun to rise modestly into a pattern of higher highs and higher lows (Figure 14).  The modest rise in the VIX indicates a rally that is gathering volatility, but until this rising trend is confirmed by widening credit spreads, deteriorating forward guidance and outright declines in earnings, the cyclical peak may remain over the horizon. If historical patterns hold true, the current resilience suggests that the market may spend the middle of this decade projecting growth toward infinity – postponing structural questions until the closing years of the decade. If the market does continue to rally, however, that rally might become increasingly jagged and susceptible to sharp corrections.

While stretched top-down valuation metrics like price-to-sales and Shiller CAPE invite historical comparisons to 1929 or 2000, the underlying structure of the market tells a more nuanced story. Unlike previous cyclical peaks, corporate earnings expectations continue to expand rapidly enough to suppress forward P/Es, while high-yield credit spreads show few signs of corporate distress despite problems in the private credit market and rising defaults on credit card debt and auto loans.