The backdrop: From rebound to euphoria

Post-pandemic and resultant aggressive increase in interest rates, the general assumption was that global equities would be flat or lower. But something strange happened: markets roared back.

The rebound was because of a variety of reasons:

• Relief in inflation brought optimism to investors that at last, central banks will cut interest rates.
• The AI, green energy, and automation technology boom created a wave of excitement — and returns.
• Corporate bottom lines, although spotty, rode out the crisis better than expected.

And hence, benchmark indices like the S&P 500, NASDAQ, and Nifty 50 continued to touch record highs. This bull market, though, raised a very relevant question — are valuations reasonable or is it mania?

 The valuation puzzle: Price vs. earnings

The traditional way of ascertaining whether shares are expensive is the price-to-earnings (P/E) multiple — roughly, the price that investors are willing to pay for every rupee (or dollar) of earnings in enterprise.

• Two or three generations ago, the American market was around 16–18x earnings. Now it’s somewhere around 22–25x, thanks mostly to the mega-cap technology giants.
• India’s Nifty 50 is also above its long-term average, with some of the hot sectors trading at 30x and higher.

Not always a bubble — but definitely investors are paying a premium for growth in the future. If earnings are not growing fast enough to justify these prices, there come rough corrections.

 The AI and tech bubble: Speculation or innovation?

Just like the late 1990s dot-com bubble, the present AI boom too has two sides.

One side is that progress in generative AI, semiconductors, robotics, and cloud computing is real and revolutionary. Players like Nvidia, Microsoft, and Alphabet are getting true returns on their AI wager, not investment.

But simultaneously, AI is used as a buzzword dumped onto virtually every IPO, venture capital company, and startup. Various money-losing or just slightly profitable companies are watching their shares soar merely for describing themselves as “AI-powered.” That is the kind of speculative frenzy that is a market froth indicator — a red flag, a tried-and-true canary in a coal mine warning signal.

Beyond tech: Where valuations are stretching

It’s not only technology. Defensive sectors like consumer staples and health care are being fairly well valued, in part because investors are rotating into “safe growth” areas. Financials and real estate, in turn, are fairly more modestly valued, in keeping with less aggressive growth expectations.

The global rally has also taken small and mid-cap stocks well above historical norms. These are the ones that correct most severely when sentiment turns, so warning investors to stay disciplined.

Too high” does not equal “immediate crash”

Remember, high doesn’t always mean overvalued, and overvalued far from means bubble bursting is imminent.

A model bubble forms when:

• Prices rise way out of fundamental value,
• Investors buy on emotion and momentum, not profit,
• And nobody takes credit for prices falling.

The market isn’t squarely in that box — even though there are definitely enclaves of excess. Plenty of investors are optimistically hopeless, but not mindlessly euphoric. There is still healthy skepticism, which paradoxically keeps everything from being an outright bubble.

Global context: Diverging realities

Geographies tell different stories:

• U.S. markets are swayed by “the magnificent seven” technology companies, and hence indices are richer than otherwise.
• Europe valuations are decent, underpinned by slowing growth as well as fading overheating risk.
• India saw robust flows after domestic consumption, but valuations of midcaps and smallcaps are a concern.
• Emerging markets in broad are a mixed bag — some are reasonably priced, while others look stretched by spec flows.

The bottom line

So, are we in a bubble? — not yet, but the air feels thinner.
Stocks are not overvalued anywhere, but investors are paying premiums for growth and stability, especially in industries linked to AI, clean energy, and digitalization.

The key question isn’t whether valuations are high — they clearly are — but whether the underlying earnings can catch up. If corporate profits continue to expand and inflation stays moderate, markets can grow into these prices. But if earnings disappoint or economic conditions tighten again, a sharp correction is very possible.

In short

• We’re in an optimism phase, not pure mania — yet.

keen investors still exist, but cautiously, diversified, and with close monitoring of fundamentals.