If the stock market had a therapist, they’d probably say:

“You’re ignoring all the warning signs again”

Because right now, valuations aren’t just high. They’re stratospheric. Every major signal that normally flashes “overvalued” is now practically screaming it. Let’s break down a few of them in order of how reality usually hits investors.

The Sahm Rule: The calm before the stormLet’s forget about the stock market for a bit and dive into the real world, something that concerns you, me and the average Joe.

The Sahm Rule signals the start of a recession when the three-month average unemployment rate rises by 0.5 percentage points or more above its lowest level in the past year. In simple terms, it’s an early-warning system showing that job losses are spreading — and every time it has been triggered since World War II, well, a recession followed.

-Current reading (Aug 2025): 0.13
- Trigger level: 0.5
- Historical record: flawless — it’s never given a false alarm.

“The Sahm Rule doesn’t predict recessions. It announces them.”

Right now, the indicator sits at 0.13, well below the danger threshold. That means the economy is still holding steady — at least on paper. But here’s the catch: once that number ticks above 0.5, the slowdown is already in motion. And by the time most people notice, it’s too late to prepare.

For now, it’s the only gauge still giving markets the benefit of the doubt, but it’s also the one that tends to speak last.

Price-to-Earnings Ratio: Paying for a perfect future
If the Sahm Rule reflects economic reality, the P/E ratio captures market imagination, or delusion, depending on your mood. It tells you how much investors are willing to pay for every dollar a company earns.

Historically, the market’s overall P/E has hovered around 15 to 16, though this varies widely by industry: tech and growth stocks tend to command higher multiples, while cyclical sectors like energy or manufacturing often trade lower.

Today, the NASDAQ-100’s P/E ratio stands at 33.17, roughly double the long-term norm. That’s not quite dot-com-level mania (which peaked above 40), but it’s close enough to smell the euphoria. Even before the 2008 crash, valuations were only in the high 20s.

“When the market prices in perfection, even good news isn’t good enough.”

A high P/E can be justified for companies growing rapidly — but when the entire market trades at those levels, it implies investors are betting on an endless earnings boom. The problem? Earnings growth eventually stalls, margins compress, and the fantasy fades. It always does.

The Buffet indicator: A house too big for its foundation
Warren Buffett calls this his favorite “single measure” of market valuation. It compares the total market capitalization of all publicly traded U.S. stocks to the country’s gross domestic product (GDP) — the size of the real economy. Think of it like checking whether your house still fits the foundation it’s built on.

Today, that house has grown a few extra floors. The Buffett Indicator currently sits at 214%, the highest level in history. The historical average is roughly 100%, meaning the market’s value used to mirror the economy’s output.

For comparison:
- Dot-com bubble (2000): ~150% before the crash.
- 2008 crisis: plunged to 50–60%.

“When the market’s worth twice the economy it rests on, the floorboards start to creak.”

At 214%, the market is more than double the size of the economy it supposedly reflects. That’s not efficiency — that’s detachment. It’s the financial equivalent of a skyscraper built on a suburban driveway.

Price-to-Sales (P/S): Have profits become optional?
If P/E ratios can be stretched by accounting tricks, sales can’t. That’s what makes the Price-to-Sales ratio (P/S) so brutally honest — it shows how much investors are paying for each dollar of actual revenue.

Today, the NASDAQ-100’s P/S ratio is 6.7, versus a historical average of 1.0. At the peak of the dot-com bubble, the market barely crossed 2.0. In other words, investors are now paying almost seven years’ worth of sales upfront for the privilege of owning stocks.

“When you’re paying seven years of revenue upfront, you’re not investing — you’re time-traveling.”

High P/S ratios can make sense for early-stage disruptors, think breakout tech firms with exponential growth. But when every major company trades that way, it stops being about fundamentals and starts being about faith. This is the kind of broad-based exuberance that usually ends in a sharp reversion to reality.

Sentiment indicators: when the crowd gets loud
At ONE-SIGNAL, we purely focus on sentiment indicators, so let’s have a look here.

Sentiment indicators try to measure the mood of investors such as fear, greed, optimism, or dread. When those moods cross into extremes, they often lead market turns (or at least confirm them). Some common gauges: the Put/Call Ratio, VIX (volatility index), Fear & Greed Index, and surveys like AAII’s Investor Sentiment Survey.

· Put/Call Ratio: This ratio (of put option volume to call option volume) is a classic crowd‐sentiment measure. A low ratio often signals strong bullish bias (lots of calls), while a high ratio suggests fear.

· Fear & Greed Index: A composite sentiment index (0 = extreme fear, 100 = extreme greed). Current readings are modest (not in “deep greed” territory yet), but the index tends to turn dangerous when it pushes toward extremes.

· AAII Investor Sentiment Survey: Measures the percentage of surveyed investors who are bullish, bearish, or neutral. The “% Bullish” reading is currently ~34.87%, below its long-term average ~37.62%.

· Bull/Bear Spread: The difference between bullish and bearish sentiment in that survey is low and even negative. The current Bull-Bear Spread is about –13.96%, indicating more bears (or pessimism) than bulls.

These aren’t screaming alarms yet, but they suggest caution — not delirium. The crowd isn’t wildly euphoric (at least not universally), which gives us some buffer before sentiment becomes a blow-off.

Final Thoughts: When Everything Screams “Expensive”
The story these indicators tell isn’t subtle — it’s a chorus. The economy is holding up (for now), but valuations are floating far above anything history would call normal.

• The Sahm Rule shows the job market’s still intact, but one uptick away from signalling recession.
• P/E and P/S ratios reveal investors are paying lofty premiums, assuming future growth will justify today’s prices.
• The Buffett Indicator shows the market’s size now dwarfs the real economy beneath it.
• Mean Reversion warns that prices are stretched far beyond sustainable levels.
• And Sentiment Indicators — the market’s emotional pulse — show a crowd that’s not yet euphoric, but increasingly confident, even complacent. Fear has left the room, replaced by quiet conviction that prices will keep climbing.

“The most dangerous time in markets isn’t when everyone’s scared — it’s when everyone’s sure.”

At ONE-SIGNAL, we track these macro and sentiment indicators to help traders understand where risk might be hiding beneath the surface. Markets don’t move on data alone — they move on emotion, expectation, and the collective psychology of millions of participants. When those forces align too perfectly, history reminds us that balance eventually returns.

Still, this isn’t a forecast — it’s perspective.

For now, the music’s still playing, and everyone’s still dancing.
Just remember — when sentiment joins valuation in denial, that’s usually the song’s final verse.

Disclaimer: The content in this article is provided for informational purposes only and does not constitute financial advice. Always conduct your own research or consult with a licensed professional before making investment decisions.