“The market’s biggest companies and other darlings of related technology are still receiving significant premiums,” said Glenmede’s Jason Pride and Michael Reynolds. “Excessive valuations provide scope for downside risk if earnings fall short of expectations. Market concentration should reward efforts to diversify portfolios on a regular basis.”

“Valuation alone is not a reason to be pessimistic, but it does impact the risk-reward ratio in the short term,” said John Belton of Gabelli Funds. “Conclusion: Next year we will be a little more cautious with stocks than with our positioning. Credible reasons to be excited, balanced by high valuations and a host of unknowns.”

However, Belton still believes the Magnificent Seven is well-positioned given strong earnings growth, robust earnings drivers, key AI beneficiaries and potential deregulatory benefits.

“I remain bullish on the technology sector despite concerns about high valuations,” said David Miller of Catalyst Funds. “The growth potential, particularly through AI, justifies these valuations as it significantly increases the productivity of companies.”

“Large-cap valuations appear expensive and the U.S. economy is late-stage. As a result, the road ahead may be shorter than the age of the bull market alone suggests,” Glenmede’s Pride and Reynolds said.

They found that while the current boom from 2022 to date seemed quite extraordinary, it was still the second shortest bull market with the second smallest cumulative gains since 1928. Historically, bull markets that were both late-cycle and had premium valuations past the two-year mark lasted an average of 38 months.

“The combination of a young bull market, late-cycle expansion and premium valuations warrants a neutral risk stance given the relatively balanced impact on risk assets,” Glenmede strategists concluded.

Some of the key moves in the markets:

Shares

• The S&P 500 fell 1.6% at 12:28 p.m. New York time

• The Nasdaq 100 fell 2%

• The Dow Jones Industrial Average fell 1.2%

• The MSCI World Index fell 1%

• Bloomberg Magnificent 7 Total Return Index fell 2.7%

• The Russell 2000 Index fell 2.2%

Currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro remained little changed at $1.0420

• The British pound rose 0.3% to $1.2562

• The Japanese yen rose 0.2% to 157.75 per dollar

Cryptocurrencies

• Bitcoin fell 2.3% to $93,499.29

• Ether fell 0.4% to $3,319.1

Bonds

• The 10-year Treasury yield rose two basis points to 4.61%

• The 10-year German government bond yield rose seven basis points to 2.40%

• The UK 10-year government bond yield rose six basis points to 4.63%

raw materials

• West Texas Intermediate crude rose 0.8% to $70.17 a barrel

• Spot gold fell 0.7% to $2,616.36 an ounce

This story was produced with support from Bloomberg Automation.

– With support from Robert Brand, Julien Ponthus and Chiranjivi Chakraborty.

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