I tend to be (often to my own detriment) contrarian by nature.
As a consequence, I spend a lot of time picking apart narratives.
If you’ve been reading the Cabot Wealth Daily for a while, you’ve probably come to that conclusion on your own. I’ve questioned Warren Buffett’s decision to invest in Constellation Brands (STZ), I’ve called AI a bubble (far, far too early, even if it ends up being the right call), and I share warning signs when I see them (like those currently being flashed by the “Buffett Indicator”).
I’m also self-aware enough to know my tendency towards catastrophizing.
As a result, I stay invested for the long haul and tactically allocate my positions based on my expectations for where the market may head next.
I don’t sell out wholesale and run to cash; if I did, I’d never be invested.
The Market’s Most Terrifying Chart
All of that being said, there’s one chart in particular that has me worried about the possibility that we’re near a generational top in the markets.
Here it is:
That chart is the ratio of the Wilshire 5000 index (total market cap of U.S. stocks) to the total M2 Money Supply, and it just rose above 3 for the first time since immediately before the dotcom bubble burst.
I’ve made the case before that stock market returns are largely driven by systemic liquidity, which is well-represented by M2 Money Supply.
As an aside, I’d consider productivity gains to be the secondary driver of stock market returns, but at a CAGR of 2% since 1960, productivity gains account for only a fraction of the historical, long-term inflation-adjusted returns of 6.7% for the S&P 500.
Returning to Money Supply, that ratio has me concerned that we may have, effectively, stretched our collective liquidity to its limits.
After all (and as you can see in the charts below), market participants are fully invested.
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Fund Managers Are All-In
In their latest Fund Manager Survey, BofA showed cash levels at all-time lows, which pushed their Bull & Bear Indicator to a “hyper-bull 9.4 level.”
…And Retail Investors Are Right Behind Them
The AAII Retail Investor Asset Allocation Survey shows that retail investors are similarly allocated to stocks (blue line) while spurning cash (red line).
Retail allocation isn’t yet at the pre-dotcom peak (77% allocation to stocks), but it remains historically elevated, with the November 2025 reading of 71.2% nearly matching the November 2021 reading of 71.4% (which coincided with the end of that bull run).
But there’s a silver lining…
Investors Aren’t Leveraged to the Hilt
That chart shows the FINRA Margin Balance (total amount of margin debt in customer accounts) as a percentage of the Wilshire 5000. And while it has recently risen to levels seen prior to the dotcom crash and the 2021 bull market top, it’s well shy of the highs it reached prior to the Great Financial Crisis.
In other words, investors may be betting heavily on stocks, but they’re not borrowing every penny they can to do it, which is a net positive as it’s less likely to lead to cascading crashes from forced liquidations.
So, where does that leave us?
Further stock market gains will need to come from somewhere, and it won’t (can’t) be fresh money that’s been on the sidelines, after all, everyone is fully invested (or close to it).
Gains could come from additional margin borrowing, but hopefully that’s not the case.
The best-case scenario for U.S. stocks would be massive productivity gains, most probably from automation and AI (although I’m skeptical of that).
We could also see market gains coming from further inflation of the Money Supply, as has been the case for the last 15 years (my money is on this outcome, which would be particularly good for real assets, precious metals, etc.).
But absent massive productivity gains or rapid money printing, we may simply be in a scenario where past is prologue and the market churn we’ve seen for the last few months continues to stretch on for years, with periodic bouts of selling or crashes (as we saw in precious metals) contained within smaller corners of the market.
That could translate to a generational top for U.S. equities, but not necessarily a once-in-a-generation crash, and that scenario would see opportunities for gains coming from rotation in the market, as money flows from overvalued to undervalued sectors over time, as well as outperformance by international equities (all while productivity gains and earnings growth allow companies to catch up to their stock valuations).
Why None of That Should Freak You Out
The good news is that something as simple as a diversified portfolio with periodic rebalancing (and ongoing investment) is pretty much an ideal way to play it.
If small caps are in vogue one quarter and massively outperform, rebalancing will put the proceeds in undervalued segments of your portfolio.
And if the market sputters, your regular investments will help ensure that you’re buying stocks at a discount.
Plus, if AI does start to generate the transformational productivity gains that it’s been promising, you’ll have exposure to tech and growth stocks as well.
So, to borrow a phrase from the British, don’t freak out, just “keep calm, and carry on.”
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