In recent years, Wall Street has predominantly seen bullish trends, with several key indices reaching new heights. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all closed 2025 with substantial gains of 13%, 16%, and 20% respectively. Notably, the S&P 500 recorded a third straight year of at least 16% growth, a rare occurrence matched only twice in the past century since the late 1920s.
This strong market performance has been largely influenced by optimism around technological advancements, particularly artificial intelligence, combined with expectations of future declines in interest rates. However, underlying data points including money supply metrics present cautionary signals that may temper such enthusiasm.
While frequently overlooked, U.S. money supply measures such as M1 and M2 can offer valuable insight into economic and market conditions. M1 encompasses currency in circulation along with demand deposits accessible for immediate spending. In contrast, M2 includes M1 money plus savings accounts, money market funds, and certificates of deposit under $100,000, representing funds that are spendable but generally require more effort to access.
Recent Federal Reserve data reveals that M2 money supply in December 2025 reached an unprecedented level of $22.411 trillion. Traditionally, expanding M2 aligns with economic growth and supports transactional needs, thus justifying rising stock prices in a bull market environment. This uptick also follows a significant decline in M2 observed from April 2022 to October 2023 — the largest such contraction since the Great Depression.
Despite these gains, M2's growth has lagged markedly behind the resurgence in technology-driven equity markets, creating an imbalance that merits attention from investors and analysts. A key metric highlighting this disparity is the ratio of total U.S. stock market capitalization to M2 money supply.
Historically, the market cap-to-M2 ratio has fluctuated mostly between 100% and 200%. This reflects situations where the total value of publicly traded stocks is roughly equivalent to or double the money available in M2, a benchmark consistent with balanced markets over decades. However, the ratio recently surged to a record 306%, surpassing the prior peak of 303% reached during the 2000 dot-com bubble—marking the most expensive stock market valuation in over five decades.
This elevated ratio is particularly significant because on every occasion since the late 1990s that it has risen above 200% during a sustained bull run, the equity markets faced subsequent declines ranging from 20% to as much as 78% in major indexes like the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite. This historical pattern serves as a warning for forecasted increased volatility and potential corrections in the near term.
It is important to recognize, however, that valuation tools such as the market cap-to-M2 ratio are inherently subjective and should be interpreted alongside broader market contexts. Stock market corrections and bear markets, despite their emotional impact on investors, tend to be relatively short-lived phenomena compared to the duration of bullish phases.
Research from investment analysts at Bespoke Investment Group has shown that since the Great Depression, the average bear market in the S&P 500 spans approximately 286 days, or around 9.5 months. Only a minority of bear markets have extended beyond a year, with none surpassing 630 days. Conversely, bull markets typically last about 1,011 days—around 3.5 times longer—with more than half exceeding the length of the longest bear markets.
These trends emphasize the resilience and long-term growth potential inherent in equity markets, despite intermittent periods of heightened risk and volatility. While current valuations as expressed through the stock market capitalization relative to M2 money supply underscore caution, the historical longevity and wealth creation associated with bull markets provide a foundation for measured optimism.
Investors should remain vigilant of the signals arising from monetary conditions while balancing these concerns against the longer-term performance characteristics of equities. The market's present elevated valuation metrics, combined with historic money supply levels, suggest preparedness for increased price fluctuations in upcoming periods. Still, a strategic focus on quality stocks aligned with macroeconomic trends may continue to yield positive outcomes over time.