The S&P 500 (SPX), when measured relative to M2 money supply, has now returned to the same extreme level seen at the peak of the Dot Com Bubble. This places U.S. large-cap equities and the broader U.S. stock market in a valuation zone that has historically been associated with major cycle turning points.
In past episodes when stock-to-money ratios reached multi-decade extremes, such as 1929, 1937 and 2000, subsequent equity performance featured deep and prolonged drawdowns. In the 2000 cycle, the S&P 500 (SPX) ultimately fell about 49% from peak to trough, with a multi-year path to full recovery.
Historical work on these regimes highlights that the most severe bear markets followed when elevated stock-to-money readings coincided with stretched valuations on other metrics and tightening or expected tightening in monetary conditions. Those environments tended to affect broad vehicles tied to the S&P 500 (SPX), including SPDR S&P 500 ETF Trust (SPY), iShares Core S&P 500 ETF (IVV), Vanguard S&P 500 ETF (VOO) and Invesco S&P 500 Equal Weight ETF (RSP), largely in line with the underlying index.
The empirical record, however, shows that the S&P 500 to M2 ratio has only flashed these extremes a handful of times, limiting its reliability as a standalone timing tool. Outcomes have depended on the broader macro backdrop, including how aggressively liquidity conditions evolved after the valuation peak.
Terminology
- 01M2 money supply: Broad measure of money including cash, checking deposits, and easily convertible near money.
- 02Bear market: Prolonged period when asset prices fall 20% or more from peaks.