'Rallies usually overdo it': Why JPMorgan's David Kelly is antsy while others are ecstatic

• A robust multi-year run for US stocks may have gone too far.
• David Kelly of JPMorgan Asset Management explained why he's not as hopeful now.
• Here are the biggest risks facing investors heading into 2025.

This year's exceptionally strong market rally gained steam after Donald Trump prevailed in the presidential elections, though momentum has started to fade lately.

David Kelly, the chief global strategist at JPMorgan Asset Management, isn't surprised at all.

"Rallies usually overdo it, as do corrections," Kelly told Business Insider in a recent interview. "Markets rarely stop it at a point where it is called reasonable."

Kelly is far from a permabear, though he has grown more pessimistic about US stocks in recent months since he's worried about Trump's plans for tariffs. Other strategists share his concern, though investors have another type of fear: the fear of missing out on gains.

Stocks had their best day in years after Trump's win, and stayed hot for several reasons. Many in the business world were relieved or fired up about tax cuts and deregulation, while others may have been disappointed or upset but chased the rally higher. Kelly suspects that others might not have felt strongly either way, but didn't want to sell and incur big capital gains taxes.

"There are things which prevent people from selling out, even if they're kind of worried about the stock market being high," Kelly said. "And meanwhile, you have fresh enthusiasm pushing other people back into the market. I think there is a certain enthusiasm among those who were looking for or hoping for a Trump victory, which I think has helped the market move higher."

Stocks may get altitude sickness

This frantic push to add exposure to stocks — for whatever reason — has sent the S&P 500's already elevated earnings multiple to a level that Kelly is no longer comfortable with.

"The levels of valuations do make me feel a little queasy," Kelly said.

Conventional wisdom is that higher stock valuations translate to lower long-term returns, though price-to-earnings ratios have historically been a highly unreliable market timing mechanism. Those who steered clear of expensive US markets in recent years would have missed out on the best rally in a generation, contrary to what many bears predicted.

Investors have now become conditioned to expect double-digit gains, which Kelly doesn't think is sustainable long term. However, betting against US equities has been a losing proposition.

"The market should not be giving you 20%+ per year," Kelly said. "But in four of the last six years, the S&P 500 has given you better than 20%."

Despite what recent history would suggest, Kelly said a down year for stocks is quite possible.

"People have the sense that if they're not invested in equities, they're missing out on a very big gain," Kelly said. "But the truth is, in the long run, it shouldn't be that big a gain."

A seemingly obvious parallel to today's market is the late 1990s, where US stocks rose by at least 19% for five straight years. That run was followed by the dot-com bubble, which predated a so-called "lost decade" for equities that was also marred by the financial crisis.

The US exceptionalism in markets reversed in the early- to mid-2000s, and considering how expensive valuations are once again, Kelly can't rule out a repeat.

"I'm not predicting that things will be as bad as they were in the first decade of this century, where the market basically didn't move for a decade," Kelly said. "We had these two big bear markets, and by the end of the decade, it was pretty much where it was at the start. I'm not saying that that's what we're headed for here, but it is notable that the valuations are at their highest point since that."

Rampant speculation is a major red flag

The dot-com bubble was marked by both lofty valuations and rampant speculation in risk assets like unprofitable tech companies trying to make a fortune from the internet.

Many market observers have warned of a similar phenomenon today, as investors ramp up bets on highly volatile assets like cryptocurrencies and crypto-adjacent stocks like MicroStrategy that can make tech stocks tied to artificial intelligence look tame by comparison.

This risk-it-all, diversification-be-damned approach to investing is deeply troubling to Kelly.

"I was in an Uber heading off to LaGuardia yesterday, and the Uber driver was telling me all about his bitcoin and how he has two bitcoin," Kelly said last week. "That's how he was thinking about investing. And I tried to point out to him — I'm not trying to advise him on what to do — but there is nothing there. This is not a currency. This is merely a focus for speculation."

Kelly didn't comment further on cryptocurrencies' merit — or lack thereof — but he believes the vast majority of those buying these assets are simply doing so in hopes of offloading them later at a higher price. Many of these traders might not even know what they're buying.

"It's based on what for many centuries has been known as the 'greater fool theory' of investing — that there is some greater fool who will pay you more money than you just paid," Kelly said. "And, admittedly — in America in the 21st century — there doesn't seem to be any lack of greater fools. But eventually, the supply will give out."

One common criticism of crypto is that the assets aren't tangible like other commodities and don't produce anything in the way that companies produce profits and, by extension, dividends.

"At least in the housing bubble, you only had four walls and a roof," Kelly said. "I mean, there was something there. It might not have been worth what you thought it was worth, but there was something there. But a lot of this investing is something that is pure fabrication."

The speculative fervor in markets is partially the Federal Reserve's fault, Kelly said. A decade of rock-bottom interest rates in the 2010s made money abundant, which pushed money into riskier and riskier investments. Pandemic-era stimulus fueled that mania, and while rates have since risen, the dopamine-infused trading spree doesn't seem to be dying down.

"If your mindset is that Wall Street is a casino where you could make 20% of your money by just investing in big companies or make much, much more than that investing in crypto, it really detracts from fundamental analysis of what is an investment or what generates income or what's a viable business in the long run," Kelly said.

Investors might say they aim to buy low and sell high, but most people really just want to buy and hold the winners. That's why market concentration has been remarkably high, as the 10 largest stocks make up more than a third of the S&P 500, according to Goldman Sachs.

Most portfolios are unbalanced with excess exposure toward US stocks and growth names, Kelly said. If there's an economic slowdown or shock, or even a black-swan event like another pandemic, those high-fliers could quickly get grounded — with disastrous consequences.

"I never worry about the stuff that I can see straight ahead," Kelly said. "The thing that gets you is always a thing around the corner, and if people don't even want to mention it, that's what we're vulnerable to."