U.S. stocks have reached their highest valuation compared to government bonds since the dot-com era due to a technology-driven rally. This raises concerns among investors about the significantly increased valuations of leading technology companies.

The recent record run of the S&P 500 Index has pushed the so-called forward earnings yield – expected earnings relative to stock price – down to 3.9 percent. At the same time, the yields on ten-year U.S. government bonds have risen to 4.65 percent. The resulting negative difference between the two values, known as the Equity Risk Premium (ERP), marks the lowest level since 2002.

Investors are willing to hold large tech companies without a significant risk premium," says Ben Inker, Co-Head of Asset Allocation at GMO. "This is a dangerous attitude.

The high valuations are driven by strong demand from institutional investors for U.S. growth stocks as well as the ongoing hype around the "Magnificent Seven" – the seven largest U.S. tech stocks. Some analysts argue that the ERP indicator may underestimate the actual risks, as it is based on currently above-average profit margins that may not be sustainable in the long term.

An alternative valuation approach that compares the earnings yield with inflation-adjusted US government bonds also shows that the risk premium has fallen to its lowest level since the dot-com bubble – although not into negative territory.

While skeptics fear an overheating of the market, other analysts consider the high valuation levels justified. According to Goldman Sachs, the current valuation ratios are in line with macroeconomic conditions, including interest rates and labor market situation.

However, the pressure on stocks could increase if US Treasury yields continue to rise, as bonds would then be considered an attractive alternative for investors. Chris Jeffery, Head of Macro Analysis at Legal & General, emphasizes: "There are several warning signals that should make investors cautious, especially the discrepancy between the valuation of US stocks and the rest of the world.

Despite the uncertainties, many investors remain optimistic. However, Andrew Pease, Chief Strategist at Russell Investments, warns against focusing too much on the big tech stocks. "2025 is the year when diversification becomes more important than ever.