Is the Market Too Expensive?

The market is expensive. You've probably heard that sentence more times this year than you can count. I know I have. It shows up in the headlines on television and YouTube thumbnails and at backyard barbecues. It's become one of those phrases we repeat so often we rarely stop to ask a simple question. What do we really mean by the market? Because I think once you answer that question, the entire conversation changes. [Music] You're listening to the Thoughtful Investor podcast brought to you by Yock Advisors. of Yach Advisors in Southlake, Texas. Imagine standing at Churchill Downs on Derby Day. 500 horses are lined up at the starting gate.

I know that's absurd. 500 is a lot of horses. Bear with me. We'll get through this analogy. Some of the horses are champions. Some are newcomers. Some have been winning for years while others haven't had their moment in the sun. The race begins but almost immediately the camera stops showing all 500 horses. They zoom in on a handful of the leading pack. Let's just say about seven to ten of them. The commentators analyze them. The headlines celebrate them. Before long you almost forgot the rest of the field exists. Now if you're following here you know 500 was intentional and you know seven to ten is intentional because we're talking about what most people think of when they think of the stock market.

The S&P 500. The Standard and Pours. The S&P 500 sounds perfectly diversified, right? 500 of the largest companies in the US representing every major industry and sector and it's diversified. 500 companies. But it's also weighted by size or market cap which means that not every company has the same influence. As of July 2026 when this is being recorded the 10 largest companies make up roughly 36% of the entire index. Let me say that again. As of July 2026 the 10 largest companies because it's market cap weighted make up roughly 36% of the entire index. 36 cents of every dollar put into the S&P goes into 10 companies.

One company alone, Nvidia, currently the largest, makes up for about seven and a half percent. Here's an interesting note. It would take around 250 of the smallest companies in the S&P 500 to make up the market cap of one stock, Nvidia. So Nvidia has the market cap of 250 of the smaller companies on the S&P. These aren't small companies either. In those 250 there's name brands like Expedia, Hershey, Dr. Pepper, Kraft Heinz, Halliburton, Hewlett Packard, T. Rowe Price, Clorox. These aren't tiny startups. These are household names. These are huge companies yet together the market cap of these 250 companies barely equal one. That means when these companies have a spectacular year it feels like the market is unstoppable.

When they struggle suddenly everyone starts asking whether the market is in trouble. They're asking about the economy but they're referencing the market. If the S&P is down does that mean the economy is not doing well or does aren't doing well? If our portfolio is large cap heavy we're often reacting to the performance of a remarkably small group that pulled away from the rest of the field. Going back to Churchill Downs we're reacting to the performance of a small group that's pulled away from the rest of the field, the top 10 horses. You might think fine I'll just buy a total market index instead, right? So that's more stocks.

That should be better diversified. It's certainly more diversified. Technically it owns over 3,700 companies but here's what's fascinating. It's still market cap weighted and nearly 89% of its value is made up of the S&P 500. So if you buy a total market index 90 cents on the dollar is right back in the S&P 500. You're only getting 10% more diversification there and those same 10 diversification there. Those same 10 mega cap companies still make up roughly 32% of the entire fund. In other words adding another 3,200 companies changes the number of holdings dramatically but it changes the portfolio much less than most people think. But think about it.

What do you think the number one company on the S&P 500, the largest company in the US, was 15 years ago? It wasn't Apple. It wasn't Microsoft. It wasn't Nvidia. It was Exxon Mobil, a spot that it held from 2005 all the way until 2012 when it lost its top spot to Apple. That surprises a lot of people. If you're curious, Exxon Mobil now sits at the number 17 spot. So it's no slouch but that still makes up for less than 1% of the index. Less than 1% of the index is what used to be the largest company. Go back another decade and the largest company before that was General Electric.

Go back further. You'll find companies like IBM. Each generation tends to believe its champions are permanent. In the early 2000s oil seemed indispensable. Industrial manufacturing seemed untouchable. Every generation has its defining innovation. Every generation has its defining untouchable. Every generation has its defining innovation. Today many people believe that innovation is AI, artificial intelligence. History has a way of reminding us that leadership is temporary. The companies change, industries change. Consumer preferences change. Technology changes. Capital flows towards whatever appears to solve Capital flows towards whatever appears changes. Capital flows towards whatever appears to solve tomorrow's problems better than today's solutions. That's not a flaw in capitalism. That's the entire point.

What is tomorrow's innovation going to be? If you only follow the headlines, you'd think that there's only two possible conclusions. Either AI is the greatest investment opportunity of our lifetime or we're watching the biggest run-up since the dot-com bubble. I don't find either explanation particularly satisfying. There are certainly similarities like in the late 1990s we're witnessing a transformative technology that's attracting enormous amounts of capital. Companies are racing to build infrastructure they believe will power the next generation of computing. Back then it was all fiber optic networks, internet infrastructure. Today it's data centers, advanced semiconductors, network equipment, and enough electricity and energy to power them all.

But that doesn't necessarily tell us a whole lot about whether earnings are going to be sustainable through this big boost in investment. That remains to be seen and the market has high expectations. But there's important differences too. Many of the companies at the center of the dot-com boom had little more than a promising idea and a website. You've probably heard the term garage startup. Literally taken from the idea that you're starting a multi-national corporation out of your your mom's basement or garage. Today's leaders are some of the most profitable businesses ever created. Microsoft, Apple, Alphabet or Google, Amazon, Meta, Facebook, and Nvidia generate extraordinary cash flows, maintain fortress balance sheets, and employ some of the brightest engineers in the world.

They've already transformed the way billions of people live and work. That is an optimism that's simply an acknowledgement of what these companies have already accomplished. But there's another distinction investors sometimes overlook. A great company isn't automatically a great investment. You can own one of the best businesses ever created and still earn disappointing returns if you pay too much for it. Investing has never been just about buying wonderful companies. It's about buying them at prices that leave room for reality to exceed expectations. That's why I think the more interesting question isn't whether AI will change the world. It already has. The more difficult question is whether today's stock prices already assume most of that success or whether there's still value there.

That's why I find the current wave of AI investment so fascinating. Every major technology company spending a staggering amount of money building data centers, buying chips, expanding power infrastructure, and racing to develop artificial intelligence. It's tempting to look at those numbers and conclude that everyone's lost their minds. I'm not convinced that's what's happening. Imagine you're the CEO of one of those companies. If artificial intelligence truly transforms the global economy and you fail to invest, history may remember you as the executive who missed out on the biggest technological shifts of the century. On the other hand, if you invest too much, you may waste billions of dollars, but your company probably survives.

One mistake is existential, The other is expensive. When viewed from that lens, the race begins to make a lot more sense. They can't afford to be the only horse that stops running. This reminds me a lot of how mutual fund companies tend to track pretty closely to the index, because if they deviate too far from the index, they risk underperforming their peers. Now, in order to outperform your peers, you have to risk being the outlier, but outperform your peers, you have to risk being the outlier, but it's a lot easier to justify to shareholders that, "Hey, I'm doing bad because the index is doing bad," when you're close to the pack.

Whereas if you're doing worse than the index, you're out of job. In order to be a good CEO, you're needing to at least stay competitive in your investment in these technologies. History also offers a useful reminder. Transformational technologies often change the world. Railroads changed America. Electricity transformed industry. Oil and gas fueled America. The internet reshaped nearly every aspect of the world. But while those technologies become indispensable, not every investment associated with them produced extraordinary returns. Sometimes too much capital rushes into a promising idea. Sometimes expectations outrun reality. The technology succeeds while investors who paid the highest price are forced to wait years for the fundamentals to catch up.

That's why I think the question, "Are we in a That's why I think the question, "Are we in a bubble?" is probably the wrong question. The answer will be revealed in time. But a more interesting question is, "What expectations are already built in today's prices?" And, will this investment pay off in the long run?" If artificial intelligence delivers decades of productivity gains, today's investments may look brilliant. If those gains arrive more slowly than investors expect, the businesses themselves may continue thriving while the stocks struggle to justify the optimism that was already priced in. If AI doesn't monetize, then the bottom could fall out, even though it may be a high quality company with great earnings and a promising future.

Those are two very different outcomes. As investors, it's tempting to spend our time trying to identify the next champion to predict which horse will win the race. History suggests that's an incredibly difficult game and comes with a lot of pitfalls. The better lesson may be simpler. The race never ends. The Capitalism keeps going. Yesterday's champions become today's incumbents. And today's incumbents eventually make room for tomorrow's innovators. Rather than assuming today's winners will dominate forever, I think it's wiser to remember that markets are constantly reinventing themselves. That's what they've always done. And if history is any guide, that's what they'll continue to do. That's also one of the main reasons diversification exists.

Diversification isn't an admission that you don't know Diversification isn't an admission that you don't know anything. It's an acknowledgement that the future is bigger than your certainty. One of my favorite illustrations of this is the periodic table of investment returns. If you've never seen it before, it almost looks random. Every year the colors reshuffle. Large cap stocks lead one year. International stocks lead another. Small companies have their turn. Real estate has its moment. Bonds step in to manage risk in down markets. You look at some of the worst markets. Bonds and cash are the best performers. Yesterday's winner often becomes tomorrow's laggard. And yesterday's disappointment sometimes becomes tomorrow's leader.

The lesson is that a discipline investment strategy starts with preparing for all outcomes and not getting caught up in the new cycle. caught up in the news cycle. I know that's boring. You've got to be boring. You want to be a good investor. You have to be boring. You can't be the hare in the You can't be the hair in the tortoise and the hair. You have to be the tortoise. You have to be boring. The market has never stood still. It didn't stop with railroads, electricity, oil, the internet, AI, and it won't stop with whatever comes next. The names will change. The leaders will change.

The headlines will change. But the principles of successful investing rarely do. You cannot control what happens next. However, as an investor, you want to put your time and energy in things you can control. Build a diversified portfolio. Follow a thoughtful plan. Stay disciplined in a world that is noisy. Meet with a financial advisor if this isn't something that you want to do yourself. And make sure that person's a fiduciary. Make sure they have your best interest in mind. Make sure that the investments that you're being put in aren't speculation type investments. That they're broad enough to plan for all different outcomes. Ask the question, "What happens if the market does this?" Ask the question, "In 2008, what did the conversation sound like when I was going through this volatility?

What will it sound like next time at this stage in my life?" I want to make sure I have a plan that's going to give me the best chances of chance of success regardless of what happens in the market, success regardless of what happens in the market, regardless of if AI monetizes the way that the market thinks. If you enjoy this perspective, consider subscribing. Here we focus less on predicting what's next and more on understanding the principles that have stood the test of time because markets will always surprise you. But a good plan doesn't have to. I'm Bryan Yach, Wealth Advisor and owner of Yach Advisors.

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