Do traders think the stock market looks frothy and overvalued?
Traders are becoming worried about market froth and overvaluation for stocks as they digest headlines about tariffs and peak corporate profit margins.
Two out of three traders believe the stock market is currently overvalued, according to a new survey from Charles Schwab released on Tuesday. The study captured responses from 1,040 active trader clients at Charles Schwab and was conducted from Jan. 8-17.
Active traders cited megacap tech and artificial intelligence stocks among the most crowded trades.
“It’s clear that the majority of traders believe there’s some froth in the market but, on balance, they also feel like there’s still more room for the bulls to run,” Charles Schwab head of trading services James Kostulias said.
Traders are most bullish on energy, IT, finance, and utilities stocks. The most bearish sentiment was reserved for the real estate, consumer discretionary, and healthcare sectors.
Concern about stock valuations has begun to creep into the names that have led the market over the past year. Shares of Robinhood (HOOD), for example, have plunged more than 25% in the past five sessions.
Other leaders under pressure include JPMorgan (JPM), Goldman Sachs (GS), and Palantir (PLTR). All three stocks have underperformed the S&P 500 (^GSPC) in the past five sessions. Palantir has lost the most, with a 30% plunge amid heightened worries about insider stock selling.
The real long-term leaders of the bull market also continue to perform weakly.
The “Magnificent Seven” trade of Meta (META), Amazon (AMZN), Google (GOOG), Apple (AAPL), Nvidia (NVDA), Microsoft (MSFT), and Tesla (TSLA) has been a mixed bag at best in 2025.
Only one of the large-cap tech components — Meta — has meaningfully outperformed the S&P 500 this year. Even after their 8% sell-off the past five sessions, shares are still up 12% year to date.
AI darling Nvidia is down 5% year to date amid a sell-off going into earnings on Wednesday evening. Tesla’s slide this year has now touched 25%.
“If the largest, best performing, names have lost their market leadership for now, it may be hard for the indices to make new meaningful highs in the short-term,” 22V Research strategist Jeff Jacobson wrote on Monday.
The Nasdaq Composite (^IXIC), Dow Jones Industrial Average (^DJI), and S&P 500 are all slightly lower in the last month.
“Although the primary stock market uptrend remains intact and our team’s work suggests recession risks remain relatively low, the near-term risk/reward appears more mixed,” Truist’s co-chief investment officer Keith Lerner wrote in a client note this week. “Indeed, we have seen modest deterioration in earnings, technical, and economic trends that warrants a more neutral equity posture and slightly higher cash.”
The long-term market bull downgraded his view on stocks to Neutral and rated small-cap stocks as less attractive while upgrading cash to Neutral.
“The S&P 500’s forward earnings estimates, a key pillar of this bull market, have flatlined over the past month,” Lerner added. “While this may only be a temporary pause, this moderation in earnings estimates is currently being confirmed across market caps. The flatlining of earnings is occurring at a time when the S&P 500 trades at the top-end of its valuation range.”
Brian Sozzi is Yahoo Finance’s Executive Editor. Follow Sozzi on X @BrianSozzi, Instagram, and LinkedIn. Tips on stories? Email brian.sozzi@yahoofinance.com.
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