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Jacob Sonenshine 

The stock market has felt increasingly like a bubble recently. Yet several factors indicate it is too soon to make that call.

It's no surprise that some people are alarmed. The S&P 500 is up 9.1% since Oct. 4, when it hit bottom in its latest pullback, a surge that has been likened to the rise in the market in the months before the dot-com bubble burst in 2000. Valuations have risen, even as bond yields have also popped. That is counterintuitive since such surges in yields -- many expect this one to continue -- tend to drag on stocks by reducing the current value of future profits.

Sophisticated investors know the risks, but a large chunk of the buying has come from retail traders -- ordinary people making transactions via popular platforms like Robinhood. Those less experienced investors are less likely to perform bottom-up fundamental analysis, so a rally driven by them is more likely to be driven by other factors, including hope for short-term gains.

But none of this necessarily means the market is in a bubble. "Yes, we know: There are lots of signs of speculative bubbles in the broad stock market," wrote analysts at Yardeni Research. "Not everything is in a bubble."

That includes the S&P 500, which has benefited from strong profit growth, a fact that helps counter the argument that stocks are rising for no good reason. The aggregate total of the per-share earnings companies in the S&P 500 are expected to earn over the next 12 months has risen 26% year to date, according to FactSet, in line with the index's gain in that time. While the index is trading at a higher multiple of anticipated earnings than it was in early October, valuations are in line with where they began the year.

"This year's bull market has been led by the meltup in the S&P 500's forward earnings -- suggesting fundamental support," the Yardeni analysts said.

Anyone concerned about the S&P 500's valuation should note that the average stock on the index isn't actually that expensive. Excluding the high-multiple Meta Platforms (FB), Apple (AAPL), Amazon.com (AMZN), Netflix (NFLX), Alphabet (GOOGL), Microsoft (MSFT), Tesla (TSLA) and Nvidia (NVDA), the S&P 500 would trade at 18 times the aggregate EPS expected for next year.

The "magnificent 8," as Yardeni Research calls the group, account for $12 trillion, or 30%, of the index's market cap. Including them, the index's aggregate multiple is 21 times. While it's possible those stocks are trading too expensively, their expected profits justify much of their market values, reducing the risk that the broader index's valuation is too high.

Consistent with the idea that stocks are priced fairly, investors aren't feeling particularly euphoric. The latest reading of the Investors Intelligence Bulls and Bears survey shows a ratio of 2.5 bulls to 1 bear. That is below the 3-to-1 ratio often seen dating back to 2003 and far below the plus-five level seen at times dating back to the 1980s.

"Sentiment isn't euphoric," the Yardeni analysts say.

It isn't that there are no risks, or that the market is fully rational. It's just that the market doesn't look dangerously irrational at present.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com