【TMGM Financial Recap】 Why Is the U.S. Stock Market Actually Healthier Now?

The overall price-to-earnings (P/E) ratio of the U.S. stock market currently stands at around 20.2x, approximately 21% above the median of the past 20 years. Looking at these two figures alone, it is easy to conclude that the market is in a "bubble." However, "expensive" does not necessarily mean "unhealthy." The key lies in understanding how valuations became more expensive and what changes have occurred in the underlying assets supporting those valuations. In strategy reports released by several Wall Street institutions in early August, they reached what appears to be a contradictory conclusion: the U.S. stock market is healthier now than it was a few months ago.

Valuation Structure Is Becoming Healthier

The most significant structural change during this rally has been the disappearance of the valuation gap. According to Goldman Sachs, the five largest companies in the U.S. stock market are now trading at P/E ratios only slightly higher than those of the other 495 companies in the S&P 500. The valuation premium they had enjoyed since 2017 has largely disappeared. The valuation premium of technology stocks relative to other sectors has also declined from nearly 200% at the peak in early 2000 to around 20% today.

Even more noteworthy is the shift in another direction: industrial stocks are now trading at valuations near the highest level seen in the past two decades, even exceeding those of technology stocks. Meanwhile, the valuations of consumer staples, consumer discretionary, and healthcare sectors are now higher than those of the information technology and communication services sectors.

This means that the market rally is no longer being driven solely by a handful of technology giants. Capital is spreading across a broader range of industries, and market breadth is improving. Reports from brokerage firms also support this trend: market concentration has declined significantly, with the combined market capitalization of semiconductor companies in the S&P 500 shrinking by approximately US$1.5 trillion, reducing the sector's weighting from nearly 20% to 16%.

Leverage Is Declining

The most dramatic change in July occurred among retail investors. Data shows that average daily retail cash equity trading volume fell by approximately 20% from its June peak. During the final week of July, retail investors recorded their largest weekly net selling since 2022, with net outflows for four consecutive trading days—the longest selling streak of the year. Selling pressure was most concentrated in technology stocks, where retail net selling exceeded all previous records on the platform since January 2019.

At the same time, leverage declined rapidly. Assets under management in leveraged ETFs have fallen by more than US$60 billion from their June peak. Assets in technology leveraged ETFs have dropped by around 40% from their peak, while semiconductor leveraged ETFs have plunged nearly 55%. The one-month equity financing spread has narrowed from more than 138 basis points above SOFR at its peak to around 50 basis points today. Goldman Sachs also confirmed this trend, noting that AI trade crowding has fallen to its lowest level in a year and that the deleveraging process is nearing its end.

These figures all point to the same conclusion: the market conditions seen in May and June—characterized by aggressive retail buying, rising leverage, and concentrated bets on a handful of AI-related stocks—were systematically cleared out during July.

Earnings Are Supporting Valuations

Goldman Sachs strategist David Kostin directly compared the current market with the dot-com bubble: "This is fundamentally different from the internet bubble. Back then, valuations surged to extremely high levels before stock prices eventually collapsed. This time, however, the correction in stock prices has been relatively mild while corporate earnings have remained strong."

The data supports this view. Expected second-quarter earnings growth for the S&P 500 has been revised sharply higher, from 22.4% at the start of earnings season to around 45%. According to Bank of America, excluding one-off items, S&P 500 companies are expected to deliver second-quarter earnings growth of 27% year-on-year, around four percentage points higher than the market consensus at the beginning of the earnings season.

The market volatility in July was "resolved through portfolio rotation, deleveraging, and improving fundamentals, rather than by any meaningful deterioration in the macroeconomic environment." This means the market correction was driven by internal structural improvements rather than by weakening economic fundamentals.

However, "healthier" does not mean "risk-free." The biggest concern remains macroeconomic uncertainty. Regardless of whether the Federal Reserve raises interest rates in September, U.S. equity valuations are likely to face short-term pressure. JPMorgan, Goldman Sachs, and Société Générale all paint a similar picture: deleveraging is nearing completion, valuations have become more reasonable, but macro risks continue to build.

At the same time, bearish investors remain firmly pessimistic. Michael Burry published a commentary yesterday warning that the market "may be approaching a major top and could even face a 1987-style crash." He continues to hold multiple short positions, including semiconductor ETFs, Micron, and Nvidia.