Is the stock market in a bubble?

There’s no question that valuations are starting to look stretched in some parts of the stock market. But I don’t think that should deter investors from looking for shares to buy.

It’s hard to make a case for buying Palantir shares at a price-to-sales (P/S) ratio of 120, but not all stocks are the same. The question for investors is where are the opportunities?.

Valuations

Both the FTSE 100 and the S&P 500 are trading at some of their highest price-to-earnings (P/E) multiples in recent years. And that’s because share prices have gone up faster than profits.

That makes the equation less attractive for investors, but this certainly doesn’t mean a crash is imminent. And I don’t think it’s a good reason to stay away from the stock market entirely.

In general, the fact that a stock trades at an unusually low P/E multiple doesn’t mean it has to go up any time soon. It can take weeks, months, or even years.

Equally, there’s no rule that stocks trading at high multiples have to crash in the near future. Even at a P/S multiple of 120, it’s not illegal for Palantir shares to keep going up!

One reason to stay in the stock market is just because valuation multiples have expanded. But there’s a bigger reason that I think investors should take note of.

It’s nearly always the case in the stock market that there are shares that trade at relatively low prices but could be very rewarding long term. And I think there’s one name that’s hiding in plain sight at the moment.

Inefficiencies

Shares in Amazon (NASDAQ:AMZN) fell 8% after the firm released its earnings report for the second quarter of 2025. But revenues were up 13% and earnings per share increased by 33%.

The reason the stock fell was because the company’s forecast operating income for Q3 of between $15.5bn and $20.5bn is roughly in line with where it was in 2024.

One potential cause of this is the impact of US tariffs and this is a risk for investors to consider. But at $217, I think the valuation multiple means the stock’s well worth a closer look.

The falling share price means the stock trades at a (trailing) P/E multiple of 33. That’s well below the likes of Walmart (42) and CostCo (53).

I find it hard to see that as anything other than a stock market inefficiency. And that’s without factoring in Amazon’s advertising business growing at 23% a year and AWS posting 17% growth.

Importantly, I also don’t see tariffs as a genuine threat to Amazon’s long-term competitive position. So I don’t think the stock should be trading at an unusually low P/E multiple.

Opportunities

The truth about the stock market is that there are always shares that are overvalued somewhere. I think that applies to quite a few right now, so it might be fair to say there’s a bubble forming.

Equally though, there are always shares that are undervalued. And the best thing for investors to do is keep looking for these, even when they might seem hard to find.

I have a lot of stocks on my watchlist where I think they’re in bubble territory. But Amazon’s one I’m looking at for my portfolio this month.

The post Is the stock market in a bubble? appeared first on The Motley Fool UK.

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Stephen Wright has positions in Amazon. The Motley Fool UK has recommended Amazon and Walmart. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.