Why stocks may be due for a correction

The markets may seem unstoppable, but it’s important not to become complacent.

“There’s definitely some level of froth (in the markets),” Fed Watch Advisors founder Ben Emmons told Yahoo Finance’s executive editor. Brian Sozzi on him Opening show Podcast (Watch or listen to the video above) here“There is a lot of liquidity in the market. You can see speculation through these meme stocks — that’s what’s happening.”

Emmons suggests investors use this moment to reduce concentration risk in their portfolio, or take some profits from a stock that has risen significantly this year and as a result has become very heavy.

The S&P 500 hit a record closing high of 35 on Monday. From a price-to-earnings ratio perspective, the S&P 500 is trading at 28 times, compared to a historical average of about 15 times.

The “Buffett Index,” as it’s called in Wall Street circles — which takes the Wilshire 5000 Index (which is viewed as the total stock market) and divides it by annual U.S. GDP — is now at an all-time high.

Warren Buffett’s favorite index is at about 196.2% — a sharp rise from about 137% from its September 2022 lows.

This figure is much higher than the 159.2% recorded just before the dot-com bubble.

Meanwhile, Apple (AAPL) shares have gained an impressive 30% since April, allowing it to reclaim the mantle of the world’s most valuable company (with a market cap of $3.55 trillion) from Nvidia (NVDA) (with a market cap of $3.15 trillion).

Microsoft (MSFT), Apple, Alphabet (GOOG, GOOGL), Amazon (AMZN) and Meta (META) are all trading at record high valuations. The 10 largest companies in the S&P 500 account for 35% of market value but only 23% of earnings, according to data from Torsten Slok, chief economist at Apollo (Yahoo Finance’s parent company).

The market seems to be feeling the heat all around, given near-term risks like a contentious presidential election cycle, the outlook for Fed interest rate policy remains uncertain, and corporate earnings are expected to rise by only single digits in the second quarter.

Professionals begin to line up on the other side of the trade amid these risks, demanding a quick and sharp pullback.

Mike Wilson, chief strategist at Morgan Stanley, warned this week of a 10% drop in stock prices ahead of the election. Wilson is among experts concerned about current stock valuations.

Nvidia shares were cut to neutral by New Street Research on valuation concerns.

While there is no perfect crystal ball for individual markets or stocks, Freedom Capital Markets Chief Global Strategist Jay Woods said on “Opening the Show” that 10% pullbacks happen once a year on average.

“We saw a 14% decline last year,” Woods recalled.

Three times a week, Yahoo Finance Editor-in-Chief Brian Sozzi Insightful, market-focused conversations and chats with the biggest names in business. Opening showFind more episodes on our website. Video CenterWatch on your screen. Favorite streaming serviceOr listen and subscribe on Apple Podcast, SpotifyOr wherever you find your favorite podcasts.

At the bottom Opening show In this episode, Howard G. Buffett, Warren Buffett’s son, shares some investing advice he inherited from his father.

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