By Teresa Rivas

There's the adage that you get what you pay for, and it seems to apply to this bull market. Investors have been happy to pony up for tech stocks connected to the artificial intelligence trade, given what they see as the potential for equally rich returns.

That makes valuation an unlikely culprit for Tuesday's selloff.

It's true stocks are undeniably expensive, prompting comparisons to the dot-com bubble of a quarter-century ago. Yet unlike the Pets.com era, today's big tech winners are making plenty of money, and that earnings power makes the current rally more fundamentally sound. That makes blaming high prices for Tuesday's declines seem overly simplistic.

Valuations were a convenient scapegoat however, given the Nasdaq tumbled 2% and the S&P 500 1.1% on a day when "there wasn't any specific negative news to warrant the decline and the fall was more about sentiment and profit-taking than actual negative news," as Sevens Report President Tom Essaye put it.

However, there is no real reason for investors to get suddenly jittery about stocks' lofty multiples today when they weren't concerned last week, or many other points in the recent record market run.

In fact, while third-quarter earnings season has been a good one, with a higher than usual number of companies beating top- and bottom-line estimates, the average stock price has fallen 0.4% post-earnings, according to Evercore ISI's Julian Emanuel. Companies that beat both top- and bottom-line this quarter are flat on average, compared with an average 0.8% gain over the past five years. In other words, results are good this earnings season, but market reactions are far from frothy.

Moreover, if the selloff were primarily driven by valuations, it didn't do much to correct the situation. The S&P 500 is changing hands at 22.3 times expected 2026 earnings, with the tech sector hovering just below 30 times.

Rather, it was more likely a natural and normal part of a bullish cycle.

"After six straight months of gains for the S&P 500 and seven for the Nasdaq, some cooling off this week is not just expected, it's healthy and a reminder that equity markets are not linear," noted Mark Hackett, chief market strategist at Nationwide.

The fact is the market has come so far so fast that even completely average corrections that are an expected part of historical trading patterns seem jarring -- to investors used to smooth sailing and because a 1% drawdown is a bigger absolute number with the S&P at 6800 versus 6000.

"Looking forward, one 2% drop in the Nasdaq likely isn't all that's needed to return the market to a better sense of balance, so don't be shocked if tech underperformance continues for several more trading sessions," Essaye wrote.

Yet without seeing concrete links to investors getting gun-shy on big tech's increasing capex or slowing growth, it seems unlikely the AI trade is done. Tech may see some bumps ahead and the gap between its multiple and the broader market shrink a bit, but it seems premature to think investors are getting cold feet -- particularly as the market rebounds Wednesday.

In short, the market can't go up every day, but investors holding out for bargains shouldn't hold their breath.

Write to Teresa Rivas at teresa.rivas@barrons.com

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(END) Dow Jones Newswires

November 05, 2025 18:18 ET (23:18 GMT)

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