The dumbest market in history: why this stock market rally is dangerous

Global equities continue to climb, and on the surface, everything seems to confirm the rally.

U.S. indexes are hitting record highs, with Europe following suit, and the market is celebrating the promise of a new era driven by artificial intelligence and rate cuts.

But beneath this euphoria, something isn’t quite right. And some experts are saying we’re living in the "dumbest stock market in history" and perhaps also the most dangerous.

Why the stock rally is dangerous

Valuations have long since exceeded warning levels. The S&P 500 Index is trading at more than 26 times earnings, and the Shiller CAPE ratio is approaching 40, a level last seen on the eve of the major market bubbles of 2000 and 2007.

Meanwhile, the total U.S. market capitalization-to-GDP ratio exceeds 217%, a level that Warren Buffett once described as “a very strong warning signal.”

And yet the rally continues.

Not because companies are growing faster than before, but because passive inflows (from index funds and ETFs) are mechanically driving prices higher. The bigger a company, the more money it receives. The result is an automatic cycle: the price goes up, new flows arrive, and the price goes up again.

Today, more than half of U.S. equity assets are managed through passive strategies.

This has changed the nature of the market: prices are no longer driven by fundamentals, but by mechanical flows.

The discipline of value investing (à la Benjamin Graham) has largely vanished, replaced by the inertia of capital flows

Diversification is an illusion

Many investors think they are being prudent because they own multiple ETFs. In reality, they always own the same stocks.

Apple, Microsoft, and Nvidia appear simultaneously in the main S&P 500, Nasdaq, technology, and even “dividend” ETFs.

For example, over 700 ETFs include Apple in their portfolios.
Diversification, on the surface, is complete, but in reality, it’s just a concentration disguised as prudence.

The result is an extremely fragile market.

When everything is rising, market liquidity appears abundant. However, as soon as outflows increase, ETFs turn into forced sellers, automatically unloading the same shares.

When markets go down, this mechanism amplifies volatility and declines.

A study by Jiang, Vayanos, and Zheng (Passive Investing and the Rise of Mega-Firms) confirms this: Inflows into passive funds disproportionately boost the valuations of large-cap companies, distorting price formation and concentrating risk in a few names.

The index no longer reflects the market—it defines it.

How to Invest in the "Dumbest Market in History"

The problem isn’t investors’ stupidity, but the distorted logic of the system.
A system where fundamentals matter little, momentum dominates, and economic reality is suppressed until it returns, with violence.

For investors, the answer is to return to basic principles (the forgotten ones):

• Rediscover value. Look at balance sheets, earnings, and cash flows. Real solidity will matter again.
• Truly diversify. Beyond ETFs: add bonds, gold, cash, and less correlated markets.
• Keep a cash buffer. Liquidity isn’t idle money—it’s optionality: it allows you to buy when others sell.

The "dumbest market in history" isn’t irrational—it follows a distorted logic in which size has replaced value and automation has replaced judgment.

But every bubble, sooner or later, comes with a price.

As Warren Buffett once said, "Only when the tide goes out do you find out who was swimming naked."

And in today’s market, the tide may already be starting to turn.

DISCLAIMER

The information and considerations contained in this article should not be used as the sole or primary basis for making investment decisions. The reader retains full freedom in their investment choices and full responsibility for making them, since only they know their risk appetite and time horizon. The information contained in the article is provided for informational purposes only and its disclosure does not constitute and should not be considered an offer or solicitation to the public to save.