According to the Zhito Finance APP, Federal Reserve Governor Lisa Cook issued a rare direct warning to the stock market on Monday. Cook stated, "Valuations in multiple asset classes are high, including the stock and corporate bond markets, and the risk premium valuations are nearing historical distribution lows, which suggests the market may have been priced to the extreme. Thus, these markets could face significant risks of decline due to unfavorable economic news or shifts in investor sentiment."

Federal Reserve Chairman Jerome Powell rarely speaks so plainly about the market, and Cook's remarks evoke memories of former Federal Reserve Chairman Alan Greenspan's warning of 'irrational exuberance' in 1996.

However, unlike Greenspan's comments that triggered market volatility back then, Cook's warning was not heeded by the market. The S&P 500 Index rose above 6,000 points again on Monday, approaching historical highs.

According to the New York Federal Reserve's corporate bonds market distress index, the distress level in the corporate bond market is also at a historical low. The S&P 500 Index has risen over 20% continuously in the past two years, and from a historical perspective, it is an undeniable fact that market valuations are high.

According to Goldman Sachs data, the valuation of the S&P 500 Index has exceeded two standard deviations above the average of the past 10 years relative to book value and sales.

The cyclically adjusted PE ratio developed by economist Robert Shiller is about 37, close to the highest level since the bursting of the Internet bubble. The CAPE ratio provides a long-term perspective for measuring whether market valuations are at reasonable levels by comparing the price of the S&P 500 Index to the average corporate earnings over the past decade. However, the CAPE has limited utility in predicting market tops and has historically remained high for long periods.

Greenspan's warning in 1996 did cause a brief market shake, but it did not end the bull market driven by the Internet bubble, which only peaked in early 2000. This may explain why investors reacted coldly to Cook's warning.

"Greenspan was not wrong; he just predicted it four years too early," said Art Hogan, Chief Market Strategist at B. Riley Wealth. "Since then, Federal Reserve officials seem to have tried to avoid commenting on market valuations."

Despite high market valuations, five of the eleven S&P 500 Sectors are expected to outperform Large Cap in 2024, indicating the market is gradually expanding beyond the ultra-large Technology stocks represented by the 'seven giants.' Hogan believes this trend helps alleviate concerns over valuations.

Currently, investor optimism is partially driven by the development of AI, along with expectations for deregulation policies that may be implemented by a second Trump administration.

Despite concerns over high valuations, almost all Wall Street strategists predict that the stock market will continue to rise. Even among the few bearish Analysts, such as Barry Bannister from Stifel, there is a belief that market adjustments require a deterioration in economic fundamentals, rather than just high valuations.

At the same time, excessive valuations may make the market more susceptible to shocks when the fundamentals worsen.

Kevin Simpson, CEO of Capital Wealth Planning, pointed out in a report on Monday: "The fourth quarter Earnings Reports season will begin next week, and investors will be watching whether earnings growth can support current valuation levels and analyzing how companies respond to the decline in federal funds rate."

Simpson added: "The consensus expectation for EPS growth in 2025 is close to 15%, more than double the historical average. If the Earnings Reports season raises red flags concerning expectations, especially for ultra-large Technology stocks, it will intensify concerns over high valuations."