“They say there are two sides to everything. But there is only one side to the stock market; and it’s not the bull side or the bear side, but the right side.”
Jesse Livermore, 1877 - 1940 ; American stock trader and pioneer of day trading
TRIUMPH OF THE OPTIMISTS
First published in 1923, Edwin Lefèvre’s ‘Reminiscences of a Stock Operator’ is a fictionalized autobiography based on the life of Jesse Livermore (who goes by the name of ‘Larry Livingston ’ in the book) who was a pioneer of day trading and one of the greatest investors of all time, known for making and losing multiple fortunes throughout his lifetime. Originally appearing as a series of articles in The Saturday Evening Post during 1922 and 1923, it quickly became a must - read for stock market enthusiasts and remains one of the most widely read investment classics, providing keen insights into the art and psychology of trading and market behavior.
Born in Shrewsbury, Massachusetts, to a poor farming family, young Jesse ran away from home at age 14 to escape the agricultural life his father had planned for him. Gifted in mental arithmetic, he completed three years of coursework in just one. With only five dollars in his pocket, he hitched a wagon ride to Boston, which by chance , stopped in front of a Paine Webber brokerage office. They happened to be looking for a chalkboard boy to post stock prices for customers, and Jesse seized the opportunity.
When he was 15, six months after starting at Paine Webber, Livermore made his first trade. By age 21, he had already amassed a fortune of $25,000 (equivalent to nearly $1 million in 2025 dollars). His most iconic trades occurred during the Panic of 1907 and the Wall Street Crash of 1929. By shorting the market during these crises, he reportedly amassed tremendous profits , including an estimated $100 million in 1929 (equivalent to roughly $1.5 billion today - a staggering sum at the time).
Throughout his career, he made several wrong bets that nearly wiped him out. He went bankrupt four times, but each time, he bounced back and repaid his creditors. In his view, there was as much to learn from a partial victory as from a defeat, distinguishing between losses caused by an investor’s own mistakes and those brought on by unforeseeable events - what he called ‘inconveniently timed storms.’
In those early days at Paine Webber, Livermore wasn’t merely recording numbers; rather, he carefully observed and interpreted the crowd’s mood. Like behavioral scientists today, he was a keen observer of emotion and its impact on investment decisions and financial markets. It didn’t take him long to see that the lure of profit could transform the crowd’s behavior - and even their personalities. All of a sudden, excitement filled the air as the price climbed. But just as quickly, this excitement faded, and the crowd fell silent as the stock rolled over and declined. Livermore eventually came to define these forces as greed and fear - the two dominant emotions of market behavior, which continue to shape investor decisions and market swings to this day. In his personal journal, he observed: ‘All through time, people have
basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical formations and patterns recur on a constant basis.’ He may have understood human foibles better than most.
One of Livermore’s enduring insights into market behavior is his observation that prices tend to follow the ‘path of least resistance’ - i.e. they generally continue in the direction of the prevailing trend until a clear reversal emerges. In simplest terms, regardless of headlines about individual stocks or the economy, it is the market’s broader trend that truly determines gains and losses.
Livermore’s concept of the ‘path of least resistance’ remains highly relevant in today’s seemingly unstoppable market, which is driven by feverish enthusiasm for artificial intelligence (AI) and a few mega-cap tech stocks. The benchmark S&P 500 is up more than 13% so far in 2025, rebounding from a 19% decline earlier this year and building on gains of more than 20% in each of the prior two years. The market’s relentless climb has pushed stock valuations to some of the highest levels on record. According to Bank of America’s head of U.S. Equity & Quant Strategy, Savita Subramanian, the S&P 500 stock index is trading at ‘statistically expensive levels’ on 19 out of 20 key metrics, with valuation measures such as Market Cap-to-GDP, Price-to-Book, Price-to-Operating Cash Flow, and Enterprise Value-to-Sales all at or near record highs (see chart below). Of course, the multiples are most outsized in the tech sector, specifically the AI stocks that are driving the heavily concentrated S&P 500.
For those who followed financial markets at the turn of the millennium, today’s environment may evoke memories of the dot-com bubble, and understandably so. Concerns about stretched valuations gained traction in August when OpenAI CEO Sam Altman cautioned that investors are 'overexcited' about AI, drawing a parallel to the speculative fervor of the 1990s. So, are we partying like it’s 1999 - as Prince famously sang? By comparing the performance of today’s mega-cap tech-driven S&P 500 with the Nasdaq Composite of the late 1990s - both featuring high valuations and new technology excitement - we can draw insights into the similarities and differences between these two market periods.
Jesse Livermore understood that the market is rarely rational in the short term. Prices can stretch well beyond fundamental value when driven by sentiment, liquidity, or herd behavior. His approach focused less on calling tops or bottoms and more on spotting when the market’s internal strength was beginning to shift, as in 1999, when the Nasdaq soared 85.6%, even though more than half its components fell that year. That signaled a serious deterioration in the health of the market. In comparison, 58% of the stocks in Investor’s Business Daily’s (IBD) database of 11,200 issues have risen so far in 2025.
Moreover, while today's valuations are elevated, they fall short of the extremes seen in the dot-com era. FactSet reports that the S&P 500’s forward price-to-earnings (P/E) ratio is 22.6, exceeding both its 5-year average of 19.9 and 10-year average of 18.5. At the height of the late 1990s dot-com boom, the S&P 500’s forward P/E ratio surged to roughly 32, and some measures were even higher, illustrating just how extreme valuations were compared with today’s elevated reading.
Another key difference between the two periods lies in the quality of the leading companies. Today’s market leaders - Apple, Microsoft, Nvidia, and Alphabet - are trillion-dollar firms with fortress-like balance sheets and years of consistent profitability. Apple alone generates over $100 billion in free cash flow each year, a far cry from the cash-burning dot-com companies of yesteryear. While certain AI stocks carry lofty valuations, they are largely tied to companies offering real products with strong demand, rather than unproven concepts.
At the same time, supporters of today’s lofty valuations point out that the S&P 500 has transformed dramatically over the past 25 years, with innovation - particularly in technology and communications - now representing a much larger share of market capitalization. These companies have leaner balance sheets and more efficient business models, which make them more profitable.
According to DataTrek, the average operating margins of 2025’s big five - Nvidia, Apple, Meta, Alphabet, and Microsoft - are 40 percent higher than their 1999 cohorts (39.9 percent versus 28.4 percent). Net margins are 65 percent stronger (34.2 versus 20.9). Return on equity is 2.3 times greater (66.5 percent versus 28.1 percent). And the average revenue and net income of today’s big five are 4.6 and 9.1 times larger, respectively, than the inflation-adjusted results of the big five of 1999. 40 years ago, the share of return on equity distributed to shareholders through dividends and buybacks was 25%; now, it’s 70%. These fundamental comparisons help support the argument that today’s companies deserve a valuation premium over those of the late 1990s.
This, in turn, has led to robust earnings expansion, with the S&P 500 on track for 12% growth in Q2 2025 - marking the third consecutive quarter of double-digit gains, with 81% of companies reporting earnings per share (EPS) above analyst expectations. Projected EPS growth of 11% in 2025 and 14% in 2026 suggests that resilient corporate profits should underpin continued equity strength, as earnings growth is a key long-term driver of U.S. stock market returns.
The AI buildout is likewise bolstering economic resilience at a time when consumption is softening and rates remain elevated. In the first half of 2025, AI-related capital expenditures contributed 1.1% to gross domestic product (GDP) growth, outpacing the U.S. consumer as an engine of expansion. Hardware led, with investment in computers and related equipment up 41% on the year, reflecting a surge of orders for servers and GPU systems. Data center construction spending hit a record $40 billion annual rate in June, up 30% from last year - a bright spot in an otherwise challenged construction environment. GDP increased at an upwardly revised 3.8% annualized rate in the second quarter, the fastest pace since the third quarter of 2023, the Commerce Department's Bureau of Economic Analysis said in its final estimate. Although the stock market and the economy don’t always move in lockstep, the most common trigger of a bear market is economic weakness or the anticipation of a recession. The strong GDP reading underscores that recession risks remain low.
Moreover, one of the most common triggers of a bubble’s collapse is higher interest rates. During the dot-com era, the Fed raised key interest rates by 1.75 percentage points between June 1999 and May 2000, which triggered the collapse of the tech bubble. The current monetary landscape is considerably more accommodative, with the Fed lowering its benchmark interest rate by a quarter percentage point in September and signaling that two more reductions are likely this year. All else being equal, an accommodative Fed tends to boost the stock market, with growth stocks - particularly tech companies, small-caps, and firms with high future earnings expectations - typically benefiting the most because their valuations are more sensitive to changes in interest rates.
Just as important, while certain areas show pockets of exuberance, overall investor sentiment falls short of the fervor seen in the late 1990s. Unlike the unbridled optimism of the dot-com era, today’s market psychology is marked by caution rather than euphoria, with many investors sticking to diversified portfolios instead of going all-in on AI stocks.
That doesn’t mean investors should abandon caution. Complacency breeds risk, and material threats persist, with worrisome echoes of the tech bubble and exuberance visible throughout the market: Individual investors are playing a growing role in the market, with retail trades - often dubbed ‘dumb money’ on Wall Street - now accounting for 18% of stock market volume, up from 10% in 2010. The meme-stock frenzy first seen in 2021 has reappeared, IPOs are flourishing, cryptos are in vogue, speculative trading in options has jumped, and outstanding margin debt topped $1 trillion for the first time.
A less visible but just as important risk for investors is the erosion of diversification benefits in the S&P 500, as the index has become increasingly concentrated in a handful of mega-cap stocks. Given AI’s central role in driving the equity rally, the top 10 names in the S&P 500 - each sharing similar market cap, sector exposure, and valuations - now account for roughly 40% of the index’s market capitalization and have driven most of this year’s earnings growth. Technology alone now accounts for roughly one - third of the market’s capitalization - up from about 15% twenty years ago - and represents around 25% of corporate profits, compared with roughly 12% in 2005, underscoring how heavily the market depends on investor optimism around AI. While a concentrated position in a few mega-cap names can offer the potential for outsized gains, historical data suggests that such environments often coincide with higher volatility and lower forward returns, while offering less of the diversification benefits that previously helped cushion market swings.
We’ve seen the dangers of concentration before. In the 2022 drawdown, the cap-weighted S&P 500 fell 18.0%, while the equal-weighted version - where each stock carries the same weight - declined a more tolerable 11.5%. And in 2000, the cap-weighted S&P 500 dropped 9.1%, whereas its equal-weighted counterpart gained 9.6% - a striking reminder of the benefits of diversification in reducing losses.
Takeaways for (concerned) investors
So far, 2025 delivered one of the most dramatic market narratives in recent memory: investors endured tariff-driven panic that nearly pushed the market into bear territory, only to witness one of the sharpest non-recession rallies in two decades. The Federal Reserve’s shift toward rate cuts has energized markets, propelling the S&P 500 to record highs and boosting investor optimism to levels unseen in years. Disciplined investors who stayed the course and followed their financial plan were handsomely rewarded.
After two consecutive years of more than 20% returns in 2023 and 2024, the S&P 500 has continued its climb, with a gain of over 13% year-to-date and 28 record highs in the process, thanks in part to better-than-expected corporate earnings, a resilient domestic economy, and a much-anticipated Fed rate cut. Those gains have come at a cost - stock valuations are now at their highest levels since the dot-com era. The current P/E ratio of around 23 times is matched only by a brief period in the post-Covid bull market and the tech bubble of the late 1990s, leaving investors caught between excitement and anxiety. Adding to investor unease was the Fed’s cautionary note, with Chair Powell warning that, “by many measures… equity prices are fairly highly valued." Still, it’s worth noting that high valuations are generally driven by the macro environment and are poor indicators of near-term returns. Instead, earnings growth and Federal Reserve policy have historically been more important.
Bull markets are built on innovation, and AI is no exception. We believe it is redefining the technology landscape and will continue to shape economic and market performance in the years ahead. While valuations remain elevated, the combination of strong revenue growth, Fed accommodation, and real economic impact suggests this isn’t a repeat of the dot-com bubble. However, markets don’t rise in a straight line, and with valuations looking stretched, a pullback or correction could occur at any time, underscoring the reality that equities will inevitably experience bouts of volatility. For investors, those rapid market swings can be unsettling, and the instinct to 'do something' may feel overwhelming, especially when headlines amplify the worry. Yet volatility, though unpleasant, is a natural and necessary feature of the market, reflecting not just fear but also potential opportunity.
A better, and ultimately more successful, approach is to focus on diversification, risk management, and aligning the risk in your portfolio to your unique financial goals. Diversification aims to reduce risk by ensuring that no single investment dominates a portfolio. In this way, investors can manage the impact of market fluctuations, as assets in different sectors or regions often respond differently to economic events. For example, while broad market valuations appear elevated, there are still areas of the market that present opportunity. As the chart on the previous page shows, Large Cap Growth stocks currently trade at the highest P/E ratio, while Large Cap Value and Small Caps present compelling opportunities with healthy earnings growth and more attractive valuations. Adding international assets to your investment strategy can potentially enhance your portfolio's resilience and generate additional growth. Proper diversification also means including asset classes beyond equities - such as bonds, commodities, and real estate - whose returns haven't historically moved in the same direction and to the same degree.
Managing risk in your investment portfolio is key to building wealth. A simple way to achieve this is by regularly rebalancing your portfolio - a disciplined strategy that helps investors maintain their desired asset allocation, manage risk and optimize returns over time. By regularly adjusting your portfolio to its target mix, you can navigate market fluctuations more effectively and stay aligned with your financial goals.
Successful investing isn’t about predicting the future - it’s about preparing for a range of possible outcomes. One of the most effective ways to do that is to consult your Telos wealth adviser, whose insights and expertise can guide your decisions and help you stay calm, think rationally, and avoid the costly mistakes that emotional investing can trigger.
October 2025