S&P 500 Could Be Entering a Dangerous 'Melt-Up' Phase — Money Expert Says 'This Makes No Sense'

The American stock market is once again defying gravity.

As of 11 May 2026, the S&P 500 was trading near 7,412 while the Nasdaq Composite hovered above 26,000. Technology shares continue to dominate investor attention. Artificial intelligence optimism is fuelling fresh buying. Corporate earnings remain stronger than many economists expected. Yet for a growing number of investors, the rally feels detached from reality.

Inflation still weighs heavily on households across the US. Petrol prices are edging higher again amid instability in the Middle East. Grocery bills remain painful for millions of families. Borrowing costs are far above pre-pandemic levels. And still, markets continue climbing.

Investor and market commentator Graham Stephan captured that frustration in a widely shared market commentary this week. 'The market no longer makes sense,' he wrote.

His concern reflects a wider fear spreading across Wall Street that the market may be entering a dangerous 'melt-up' phase. In financial terms, a melt-up describes a rapid surge in asset prices driven less by fundamentals and more by momentum, speculation, and fear of missing out.

Veteran market analyst Peter Grandich issued a similar warning earlier this month, telling investors that markets had entered a 'parabolic, melt-up phase'. He warned that this may now be 'the exit phase, not the enter phase.'

Why Comparisons to 1929 and Japan's Bubble Era Are Growing

Financial history is filled with moments when markets appeared unstoppable before collapsing suddenly. Analysts comparing today's rally to past bubbles often point to the late 1920s, when soaring stock prices and easy credit preceded the Great Depression.

Similar comparisons are now being drawn with Japan's 1980s asset bubble. Ultra-low interest rates and heavy borrowing drove stocks and property to extreme valuations before the market crashed in 1989, triggering decades of economic stagnation known as Japan's 'lost decades'. Investors including Peter Grandich warn the US could face a similar slowdown if asset prices continue rising far beyond underlying economic growth.

The Warning Indicators Now Flashing Across Wall Street

Several closely watched market indicators are sitting near historic extremes. The Shiller CAPE ratio, which measures stock prices against inflation-adjusted earnings over a 10-year period, has climbed above 41. Historically, the average sits closer to 17. The only period with higher readings was during the Dotcom bubble.

Another measure attracting attention is the Buffett Indicator, which compares the total value of the US stock market with national GDP. It has reportedly climbed to 229%, far above levels many investors consider sustainable.

Even legendary investor Warren Buffett appears cautious. Berkshire Hathaway ended the first quarter of 2026 holding almost $400 billion in cash and Treasury assets. Speaking recently, Buffett warned that markets appeared gripped by growing speculative behaviour.

Another concern is concentration risk. The top 10 companies now account for roughly 40% of the S&P 500's total value. That concentration is higher than levels seen during the Dotcom era. If major technology shares stumble, the wider market could quickly follow.

Economists are also increasingly discussing the risk of 'Japanisation'. The term refers to the long-term economic slowdown Japan experienced after its bubble burst, marked by ageing populations, weak growth, and sluggish productivity. The US birth rate has fallen to around 1.6 births per woman, well below replacement levels, fuelling concern about future economic strain.

Why Some Analysts Believe This Time Could Still Be Different

Despite growing warnings, many investors argue today's market is very different from previous bubbles. Firms such as Fidelity Investments say the companies driving the rally are far stronger than those seen during earlier speculative booms. Unlike the Dotcom era, many of today's largest technology firms generate substantial profits and cash reserves. Companies including Alphabet Inc., Amazon, and NVIDIA continue to report strong earnings growth.

Supporters of the rally also point to artificial intelligence, which many investors believe could boost productivity across industries from healthcare to manufacturing. Companies are increasingly using AI tools to automate tasks and improve efficiency without significantly increasing staffing costs. Investors also face another challenge: holding cash carries risks of its own. Inflation steadily reduces purchasing power over time, meaning savers who avoid markets entirely may still lose wealth in real terms.

The Emotional Trap Investors Continue to Face

History shows market bubbles are often recognised only after they burst. Even Isaac Newton lost heavily during the 1720 South Sea Bubble after buying back into the market near its peak.

For many investors, the greatest risk is not volatility itself but emotional decision-making. Financial advisers continue to recommend diversification, steady investing and holding cash during periods of uncertainty.

Markets may continue to rise for months or even years. However, some analysts warn that confidence—rather than economic fundamentals—is increasingly driving prices higher. History demonstrates that sentiment can shift quickly, often with little warning.