Overvaluation may prove fatal as markets continue to rise

As stocks continue in their long-winded streak of bull performances day after day, while now it may be evident that markets will continue to rise, overvaluation may prove fatal in ushering in correction.

A group of investors, Entrepreneur.

The S&P 500 rose 5%, breaking its previous highs in January and making new records. The Nasdaq rose 6%, and the Dow 30 rose 5% in the same period. With stocks in indexes like these having a natural growth rate of roughly 20%, a 5% rise in a month is staggering.

Furthermore, many stocks have made all-time highs while growing quickly at the same time. Nvidia several weeks ago became the first publicly-traded company to surpass $4 trillion in market cap, with its price per share reaching beyond $170, far above its low of less than $100 in the height of tariff-related panic in April. Meta also made all-time high valuations over the past month.

Yet, many investors continue to urge buying pressure as enthusiasm endures, particularly for the Mag. 7, as Needham rated Nvidia "buy." In fact, the stock rally is still continuing into early this week.

However, markets have oversaturated itself too much to handle. When market cap surpasses tangible company value in instances like this, the ultimate outcome is correction to a more stable value underscoring the actual value of the company.

Nvidia's stock chart over the past month, Yahoo Finance.

We currently rate markets as a "sell" as we expect stocks to decline into correction territory in subsequent weeks.