'Very speculative, very frothy, very greedy': Wall Street says stock market's rise to records poses risks

Stocks are sitting at record highs, but some Wall Street strategists say that very optimism could be a warning sign.

In a note to clients on Monday, Citi strategist Chris Montagu said buying activity has been strongest among smaller companies, with the Russell 2000 (^RUT) seeing the largest weekly increase in bullish bets. This has left markets more fragile, especially if momentum stalls, he said.

“Profit-taking risks have rapidly risen across markets, and are particularly elevated for Nasdaq, potentially hampering further upside,” Montagu said.

Notably, the Nasdaq 100 (^NDX) has surged roughly 46% since the April lows, underscoring how quickly enthusiasm, particularly around AI, has fueled the latest leg higher.

Citi’s Levkovich Index — which tracks flows, positioning, and risk appetite — shows markets are still deep in euphoria. Historically, returns from this level have been weaker as optimism leaves less room for upside surprises.

That picture is echoed elsewhere. Goldman Sachs said client sentiment is at its highest level since December, while Barclays’ sentiment tracker also sits firmly in “exuberant” territory. The concern is that investors may be overconfident, especially as valuations hover near multidecade highs.

According to DataTrek Research, the S&P 500 (^GSPC) is now trading at roughly 25 times expected earnings, a level the firm said “reflects complete confidence (and then some)” that profits will deliver. That implies earnings would need to climb 13% next year and another 10% in 2027 to justify current prices.

Against that backdrop, concerns about market concentration and speculative behavior are growing louder. Michaella Gallina, CEO of On Course Consulting, told Yahoo Finance’s Stocks in Translation that “we’re seeing very high valuations,” warning that with such a narrow rally, driven almost entirely by a handful of AI heavyweights, investors have “little margin of safety” if momentum fades.

“If you think you have the S&P index in your portfolio as a diversified index, it’s not today,” she said. “It’s a concentrated tech portfolio.”

Chris Watling, global economist and chief market strategist at Longview Economics, echoed that view, saying the market’s rapid climb is beginning to show classic signs of exhaustion.

“What we see at the moment is a market that’s running extremely hard,” he told Yahoo Finance on Tuesday. “It’s starting to look very speculative, very frothy, very greedy. And that’s generally the kind of setup you get before you get a pullback.”

He pointed to record levels of single-stock call-option buying, saying they’re “way above records” from prior peaks, and cautioned that even large-cap stocks are being swept up in momentum buying.

“Everyone’s getting sucked in, shorts are getting squeezed, and the market’s suddenly got no downside protection,” he said.

Watling stopped short of calling the end of the bull market but noted that short-term corrections are increasingly likely.

“I’m not suggesting the bull market is over for good,” he said. “But if you can get out of the way of pullbacks and big stocks that have gone up a lot, you can actually save yourself a lot of gains, book some gains, and get back in at a better level.”

Allie Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.

Click here for the latest stock market news and in-depth analysis, including events that move stocks

Read the latest financial and business news from Yahoo Finance