Investors Are Fretting That the Stock-Market Rally Is on Borrowed Time

Investors have a lot to feel happy about these days. That has some on Wall Street worried the 2025 rally could be on borrowed time.

The Dow Jones Industrial Average inched 0.2% higher Tuesday to close at a fresh record, leaving the index with a 5.2% gain in its best quarterly run in a year. Interest rates are coming down. Earnings growth remains robust. Tax cuts are poised to bolster corporate coffers. And analysts are racing to raise their year-end targets for the S&P 500.

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But the gains have gone so far that some investors are beginning to worry it is too much of a good thing. October is traditionally a tough month for stocks, and many investors see signs of overheating—from surging speculation on meme stocks to stretched corporate valuations—that could portend a pullback.

“The characteristics of this rally do worry me a little bit, and it feels a little late inning,” said Nate Thooft , chief investment officer of equity and multi-asset solutions at Manulife Investment Management.

Many think the gains at least originate on firm ground. The economy has proved resilient. The job market is cooling but not cratering, and the trade war has yet to power a significant rebound in inflation. Analysts now think a tariff-fueled recession is unlikely, helping propel a 14% gain for the S&P 500 index so far this year. The Dow industrials and Nasdaq composite are up 9.1% and 17%, respectively.

The run has also broadened to beaten-down shares poised to benefit from lower borrowing costs. The Russell 2000 index, which tracks smaller U.S. companies, recently closed at its first all-time high since 2021.

Pressure has also eased in the bond market, where the prospect of more interest-rate cuts has helped boost government bond prices. That has driven the 10-year Treasury yield, a key benchmark for borrowing costs for individuals and companies, down to 4.149%, below where it ended in June, according to Tradeweb. Corporate bonds have also rallied , shrinking the extra return investors demand to hold companies’ bonds over risk-free Treasurys to its lowest level in decades.

Yet some fear this year’s 28 S&P 500 records are whipping up the kind of froth that precedes a rally’s end. Individual traders, for example, are driving a 2021-esque wave of speculation. Opendoor Technologies , a real-estate tech platform and the face of the new class of meme stocks , has skyrocketed 398% this year and at times accounted for up to 13% of the entire U.S. stock market’s trading volume in a day, according to Dow Jones Market Data.

Another concern: the rebirth of special-purpose acquisition companies, or SPACs. A SPAC is a shell company that raises money and trades on a stock exchange with the sole intent of merging with a private company and taking it public.

More than 90 SPACs have raised roughly $20 billion so far this year, the highest annual tally and fundraising total since 2021, according to SPACInsider data. That was shortly before the Federal Reserve’s inflation-fighting campaign sparked a bust that erased tens of billions of dollars in market value.

And shares of new companies going public through more conventional means have jumped around 34% on average in their first day of trading this year, the best average gain since at least 2000, according to Callie Cox, chief market strategist at Ritholtz Wealth Management.

Meanwhile, the dizzying rally in artificial-intelligence stocks is raising worries about a bubble. The Magnificent Seven big tech companies— Alphabet , Amazon.com , Apple , Meta Platforms , Microsoft , Nvidia and Tesla —recently made up about 37% of the S&P 500’s market capitalization, the highest share on record.

Adding to investor concerns, some warn that President Trump ’s tariffs will eventually fuel a rebound in inflation, potentially derailing the Fed’s rate cuts and ramping up pressure on American consumers.

Mary Ann Bartels, chief investment strategist at Sanctuary Wealth, said that she believes stocks could decline 5% to 10% in the coming months if inflation shows signs of heating up and sparks a rebound in Treasury yields.

Those anxieties have manifested in lackluster performance from transport stocks, which track the railroads and air carriers moving the freight powering the economy. The Dow Jones Transportation Average has fallen 1.1% this year, one sign investors expect lower demand for goods, raw materials and travel.

And gold futures , often viewed as an inflation hedge and a haven for nervous investors, notched their best first three-quarters of a year since 1979. Silver futures are up 60%, near their own record.

Stretched stock valuations are also casting a shadow over the booming rally. Companies in the S&P 500 are the most expensive on record based on four different metrics, according to Bank of America.

That leaves some investors hunting for bargains, helping broaden the market’s concentration beyond pricey sectors. Bob Doll , chief executive of Crossmark Global Investments, said his firm owns shares of companies that are cheap on a price-to-free-cash-flow basis and have solid earnings, such as financial stocks.

“We are in a high risk bull market,” said Doll.

Write to Krystal Hur at krystal.hur@wsj.com