By all accounts Wall Street is “frothy” meaning prices are inflated, bubbly and unsustainably high. In a market racked by froth, market gains become detached from fundamentals, stocks get overheated, and investors become irrationally euphoric.
When the markets are pumped up by sentiment and speculation, it increases the risk of a sudden pullback or correction.
“A frothy market, a common Wall Street jargon, refers to a market condition where asset prices are notably detached from their true intrinsic value. Simply put, a frothy market is a market that is exhibiting unsustainable rapid price appreciation. If unresolved, it precedes a market bubble and a subsequent market bubble burst (market crash).”1https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/frothy-market
So how frothy is Wall Street? According to a recent Bank of America survey of fund managers, almost 90% believe that U.S. stocks are overvalued.2https://finance.yahoo.com/news/nearly-90-fund-managers-u-152509879.html
Buoyed by the AI revolution, rising earnings, and the embrace of American Exceptionalism with the return of Donald Trump to the White House, stocks are now among the priciest in history and investors continue to double down on big payouts.3https://www.wsj.com/finance/stocks/stock-market-overvalued-forecasts-2025-e073e1d4
Frothy Markets Lead to Dangerous Bubbles
Market froth is a precursor to the dreaded market bubble. And according to the Wall Street Journal, the market froth of 2025 has been building unimpeded and undeterred.
“Investors are fearful that some market gains are outpacing typical measures of underlying value after strong economic growth helped power the S&P 500 to record after record in a nearly two-year bull market. Trade wars and DeepSeek’s challenge to the AI boom have barely dented the enthusiasm. Meme stocks are back, options are on fire, and bitcoin is trading around $100,000. That makes some traders nervous, because rising speculation can lead to market imbalances that at times presage sharp corrections.”https://www.wsj.com/finance/stocks/investors-spot-signs-of-market-froth-during-long-bull-market-f14f44c6
Of course, the risk of all this overheating is a punishing market crash. And there’s plenty of historic precedent to justify concerns that a major market bubble is forming. In December, the S&P 500 CAPE ratio stood at 37.9, more than double its long-term average of 17.6. It has only exceeded this level during the Dot-Com bubble and in the post-Covid crash of 2021.
According to Visual Capitalist, the S&P 500’s cyclically adjusted price-to-earnings ratio (CAPE), is a widely used metric for assessing market valuation. The ratio compares equity prices to their 10-year average earnings, and it is approaching historic highs. Peak CAPE ratios have historically been followed by significant market declines.4https://www.visualcapitalist.com/sp/the-bubble-indicator-is-the-stock-market-overheating
When Bubbles Burst, Gold Shines
Gold’s negative correlation to the markets and many other asset classes, enables it to perform well when asset bubbles burst and are followed by the ensuing sell-offs, corrections, and downturns.
According to State Street Advisors, gold has functioned as a critical safe haven during some of the more recent market declines that triggered significant financial losses for investors heavily leveraged in equities.
“During periods of market turmoil and large equity drawdowns gold has provided an average 7.18% return, while the S&P 500 TR Index pulled back – 23.48%. In these types of market downturns, risk is not exclusively about managing volatility, but also about minimizing any permanent impairment to capital – and gold has historically exhibited the potential to perform positively under a multitude of disruptive financial and tail risk events.”5https://www.ssga.com/library-content/pdfs/etf/us/spdr-debunking-5-common-gold-misconceptions.pdf
Gold’s ability to perform amid “disruptive financial events” has earned it a reputation as crisis insurance, a volatility hedge, and a strategic wealth protection asset. The precious metal’s ability to hold its value and even deliver a sizable positive return during unpredictable and often catastrophic market events more than justifies its inclusion in any financial portfolio. And for investors looking for a store of value as Wall Street gets frothier, more unpredictable, and more unstable — gold fits the bill.
The Lesson of DeepSeek
Economist John Maynard Keynes, said “Markets can remain irrational longer than you can remain solvent.” His statement emphasizes the unpredictable and high-risk nature of the stock exchange. Whether one bets against its rapid price appreciation, tries to capitalize on its overvaluation, or attempts to time its return to solid fundamentals — heavy losses can be sustained by being wrong, too early, or far too late.
When China’s cheap AI model DeepSeek sparked an almost $1 trillion market implosion in late January — the volatility and irrationality of the current stock market became apparent. AI tech giant Nvidia shed almost $600 billion in market cap in one day. Just a month prior, Bank of America warned that out of the 20 valuation metrics they track, 19 were at extreme levels.
“Valuation metrics like that have been easy to accept while the market’s biggest stocks faced little outside competition and could woo investors with promises of the transformative power of new technology. But DeepSeek is now laying bare the danger that the US market has been overvalued. As its AI tool undercuts OpenAI on pricing, outperforms leading US peers, and is being trained on older and cheaper Nvidia GPUs, tech valuations are in doubt.”6https://markets.businessinsider.com/news/stocks/tech-stock-crash-deepseek-magnificent-7-nvidia-outlook-valuation-capex-2025-1
Gold closed out January at an all-time high and is currently up over 10% year-to-date. Over the past year, it is up an astonishing 44.84%. New 2025 price forecasts from multi-national investment banks like Goldman Sachs and UBS see gold climbing as high as $3100/oz and beyond for a once-in-a-lifetime buying opportunity as well as a critical hedge against the ever-expanding and intensifying market bubble.
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1 https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/frothy-market
2 https://finance.yahoo.com/news/nearly-90-fund-managers-u-152509879.html
3 https://www.wsj.com/finance/stocks/stock-market-overvalued-forecasts-2025-e073e1d4
5 https://www.visualcapitalist.com/sp/the-bubble-indicator-is-the-stock-market-overheating
6 https://www.ssga.com/library-content/pdfs/etf/us/spdr-debunking-5-common-gold-misconceptions.pdf
