Checking All The Boxes
There’s an old Wall Street saying that goes, “market bottoms are events but tops are processes.” In both cases, it is not known until well after that fact that a bottom or top was officially put in. Only time makes that determination. But tops are unique in that, because they are processes rather than events, they are far less dramatic. This probably explains another old saying: “nobody rings a bell at the top.” A top is put in and nobody notices until much later and only after the real selling has begun.
This week, Michael Santoli introduced the world of finance to the true identity of the “mystery broker,” a source of his who has regularly and accurately called important market turning points over the past two decades. In an extensive interview on CNBC, David Snyder stepped out of the shadows ostensibly to make the case for the demise of the bull market that began sixteen years ago.
In an even more extensive article on his website, Snyder argues, “Just about all of the boxes have been checked that an investor would look for to determine that the end of a secular bull market is near,” highlighting a list of twenty-one bullet points that support his case, several of which are worth exploring in some depth.
First, of course, is the extreme valuation of the broad stock market. As Bloomberg reports, “Buoyed by tech, the long-term valuation ratio [similar to the CAPE ratio] of the S&P 500 is now at an all-time high. This metric has exceeded previous peaks that preceded major drawdowns, such as in the summer of 2000 before the dotcom crash, or in January 2022 when the market started to price a surge in interest rates.”
Furthermore, GMO writes, “more than 30% of U.S. market capitalization now trades above 10x sales.” As is common knowledge today, the largest stocks in the market now make up a record share of the whole. And, as my friend David Hay points out, the market cap-weighted average trailing price-to-earnings ratio of the 20 largest stocks in the market is a lofty 55.9. Coming back to GMO, “History suggests such extremes rarely persist without painful corrections.”
It has become popular in recent years to note that valuations are not a timing tool. This is certainly true but, as Snyder notes, “This secular bull market which began on 3/9/09, is now 16 years and 8 months long. The last two secular bull markets lasted 17 years and 7 months (8/82-3/2000) and 16 years and 7 months (6/49-1/66). There has been a consistent pattern of alternating secular bull and bear markets since 1815 with most lasting between 15 and 20 years.”
Jurrien Timmer recently did a good job of plotting this pattern visually, noting, “Looking at the 1949-1968 and 1982-2000 secular bull markets, this one appears to be in its final innings.” So while valuations on their own don’t portend a near-term peak, the long-term stock market cycle clearly does. And this is just one of many indicators now lining up in support of this conclusion.
Another is the crescendo in equity risk taking we have seen over the past couple of years. As Justin Mamis used to say, “Foreigners and dentists are always the last to buy.” Well, both it seems have been buying like never before.
Ed Yardeni, notes, “Historically, heavy foreign buying of US equities has been a bearish signal from a contrarian perspective,” continuing, “The signal certainly hasn’t worked recently.” But give it time. The record surge in foreign inflows to the U.S. stock market this year dwarf anything seen at previous peaks in 2000, 2007 and 2021. Each of those precedents led to bear markets.
It’s not just foreigners, either. Speculative retail participation is off the charts, too. “The share of US stock market trading volumes accounted for by retail traders has now doubled since 2010 — and they are now more active than US mutual funds and traditional non-quant hedge funds combined,” reports The Financial Times.
Like foreign participation, frenzied retail activity also reached a new record last year. According to Reuters, “The amount of cash retail investors poured into U.S. stocks so far in 2025 is up 53% from $197 billion a year earlier and 14% higher than the $270 billion hit at the height of the retail trading frenzy in 2021.” Wall Street has been only too eager to meet this demand with a “spectacular” surge in new ETF launches. As, “a gauge of speculation and risk appetite,” this points to a very rare extreme in euphoric investor sentiment.
Many of these new ETFs utilize some sort of leverage, bolstering the sentiment signal. But a more traditional form of leverage is now sending an even stronger signal. Returning to Snyder, “As of October, margin debt has increased 40% year over year vs. only 18% for the S&P 500. Margin debt growth has only exceeded the increase in the S&P 500 by more than 500 basis points three times in the last 35 years. This occurred in late 1999-2000, spring/summer of 2007 and late 2021, all months away from major bear markets.”
Much of this increase in speculative interest has been driven by a new technology bubble, similar in many ways to the Dotcom Bubble of a quarter century ago and the railway mania of the late-1800s. The big difference this time is that the AI bubble now amounts to 100% of GDP versus just 50% and 10% of those two prior bubbles at their peaks, respectively.
Like those previous bubbles, the blinding optimism inspired by the new technology has already led to a massive overbuild in AI infrastructure. And, just as that buildout begins to show signs of stalling, some the most prominent AI evangelists are now starting to rethink their reliance on the technology and, more importantly, advise their clients to do the same. In addition, users are also finding effective ways to avoid using LLMs entirely.
As Gary Marcus writes, “Once the implications are fully appreciated, the whole thing will begin to unwind.” Because the economy is now entirely dependent on the AI mania, this would almost certainly lead to a turn in the cycle. “It’s clear that the AI-driven investment surge in narrow computer equipment is masking what would otherwise be a broad contraction in the traditional cyclical and interest rate-sensitive sectors,” writes Eric Basmajian.
Segments of economic activity like durable goods and residential investment as a share of GDP are already sending recessionary signals. Leading economic indicators have been falling for the past couple of years and the unemployment rate is rising from historically low levels; consumer confidence suggests it will only continue in that direction for the foreseeable future. In all, the economy is in a very precarious place.
On top of all these signals we can add several shorter-term cyclical indicators. First is the failure of the traditional Santa Claus rally, or the propensity of the stock market to rise during the seven-day window including the last five trading days of December and the first two of January. As yet another old Wall Street saw goes, “If Santa Claus should fail to call, bears may come to Broad and Wall.”
Even more notable, as Conor Sen points out, are the few times the over the past 25 years when the Nasdaq 100 Index has fallen during November and December: 2000, 2007, 2011, 2018 and 2025. On its own, it’s difficult to glean much from such a small data set. However, in the context of all of these other signals, it would not be surprising to see the unusual seasonal weakness of the stock market this year eventually come to be seen as the process that represents the top and the official end to the secular bull market.
Walking The Talk
On New Year’s Day, The Wall Street Journal ran a remarkable juxtaposition of two articles. In fact, there really was no other fresh reporting on the site I could see besides these two. First, was yet another piece on the record surge in retail trading activity in 2025. Second, was a piece on Warren Buffett staying true to the discipline that was the source of his great success even as he sails off into retirement.
On the one hand we have this:
It was the year individual investors took over Wall Street. Again. In 2025, small-dollar day traders and other everyday investors played a bigger role in more markets than ever before. They traded options, sent a new class of meme stocks to the moon and piled into the Magnificent Seven tech companies when the “smart money” got skittish. And they made their presence known just about everywhere else, from precious metals and sporting-event prediction contracts to public stock offerings and late-stage startup investments.
And on the other, we have this:
In a year of record stock highs, artificial-intelligence moonshots and tense standoffs on global trade, Warren Buffett spent much of it watching, and waiting for the right moment to strike. Buffett, one of corporate America’s most-prolific—and patient—dealmakers, stuck to his script in his final year as Berkshire Hathaway’s chief executive. With the market’s rally limiting opportunities to make large acquisitions, Berkshire sold more stocks than it bought and stockpiled cash.
If I still got a physical paper, it’s certainly one I would have filed away for posterity along with several of the most notable contrarian magazine covers I have seen during my career. Rarely do you get such a clear sentiment signal on the front page of what many consider to be the paper of record for the industry. Even still, I think we will look back on this as Buffett once again, in iconic fashion, walking the talk and effectively being fearful when others are greedy.
