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After slim profits, or losses, in many quarters, Amazon is the single-biggest driving force behind the S&P 500’s more than 6% gain in 2018

Shares of companies like Amazon.com Inc., AMZN -0.23% Netflix Inc. NFLX -1.76% and Salesforce.com Inc. CRM -0.49% have surged this year, driving the stock market higher but also pushing valuations to what some investors consider worrisome levels.

The valuation of the average stock in the S&P 500 is now in the 97th percentile of historical levels, according to Goldman Sachs Group Inc., which analyzed 40 years of market pricing and valuation data. The valuation level is thanks in large part to the rise of highflying tech stocks.

That has kicked off debate among investors as the bull market in stocks is set this week to become the longest in history, based on intraday trading.

Some investors believe the high valuation level shows a lack of breadth in the market’s rise, leaving stocks vulnerable to a pullback. An analysis of data going back to 1964 shows that higher multiples have led to weaker returns over 10-year stretches, according to Credit Suisse Group AG .

Other investors counter that the way tech companies operate, with heavy spending on developing new products, along with an ability to disrupt markets or create new ones, makes traditional valuation measures such a price/earnings ratios less relevant. The problem, they say, is that such formulas say more about a company’s current situation and profitability than what sales and earnings will look like five years out.

“I don’t talk about multiples. That’s where the conversation stops,” Jonathan Curtis, a portfolio manager at Franklin Templeton’s Franklin Equity Group, says of discussions with others about tech companies. “I tell them, ‘Help me understand what this business looks like at maturity.’”

He and others argue that investors have to take a longer-term view of high spending that depresses short-term profits, and so leads to elevated price/earnings multiples.

Amazon, for example, has spent heavily to expand its logistics and distribution, as well as its cloud-services arm. That led to slim profits, or losses, in many quarters, leading some investors to question a high multiple for a company constantly diving into new businesses.

Now, the stock, up more than 60% this year, is the single-biggest driving force behind the S&P 500’s more than 6% gain in 2018, as its Prime subscription service and web-services arm have created a loyal client base. Amazon’s soaring stock price is also due to its ongoing shake-up of the retail, health-care and cloud-computing industries.

Still, Amazon trades at a lofty 85 times future earnings, and over the past three years its multiple has averaged around 115 times, according to FactSet. In comparison, the S&P 500 trades at about 16 times earnings expected over the next 12 months.

Meanwhile, Netflix has spent billions of dollars to acquire content and attract subscribers to make itself the leading streaming service in the U.S.

It trades at a forward price/earnings ratio of 85 times, according to FactSet.

Facebook FB -0.52% shows, though, how companies can grow into outside valuations. Less than five years ago, Facebook was trading at more than 50 times forward earnings as it outspent rivals to dominate social media’s advertising landscape. Increased profits have brought its valuation down to 23 times TIMES today.

“You have to bring some logic to those numbers to justify these multiples,” said Sebastian Werner, lead portfolio manager of Deutsche Bank’s DWS Science and Technology Fund.

Mr. Werner’s investment team looks for a line of sight on how much extra cash a business will generate after it covers big-ticket expenses, a track record of massive revenue growth year over year and the likelihood of profit-margin growth of as much as 40%.

Perhaps most important is how much many of these companies, especially in the software space, are spending and making on their customers, said Matt Sabel, a portfolio manager for MFS Investments.

Companies like Salesforce spend massive sums to attract customers, stretching its price/earnings ratio above 50 times. But instead of looking at that cost and assuming it is high or low, some investors have taken to measuring it against the value of those customer relationships.

For a company like Salesforce with multiyear customer agreements, the value of its clients vastly outpaces its acquisition costs, bullish analysts said. By determining the ratio of the lifetime value of a customer versus a company’s customer acquisition cost, an investor can determine whether spending on marketing and sales is paying off, they add. Shares of Salesforce are up 43% this year.

“It’s very easy to analyze this year’s costs and say look at all this SPEND and it’s unprofitable,” said Mr. Sabel. “But the cash-flow stream continues to grow over many years.”

Of course, high multiples also mean companies can’t afford even small missteps. Netflix shares, for instance, have fallen 16% over the past month after it said in July that it missed its own forecasts by more than a million subscribers in the second quarter.

And some investors caution rising interest rates will force down overly optimistic valuations. The recent period of superlow rates helped support higher valuations since future profits are worth more when discounted back into today’s money. As rates rise and debt gets more expensive, profit margins will fall, said John Prichard, president of Knightsbridge Asset Management.

Valuation concerns have already crept into the market, some investors said, as defensive stocks that tend to post lower growth than companies like Amazon and Facebook have outperformed. The top five performing S&P 500 sectors the past three months are all defensive, Bank of America Merrill Lynch said in a recent note, including consume staples, utilities and health care.

“Valuations matter a lot more as you extend the time horizon,” said Mr. Prichard. Add interest rates to the mix and “at some point that will depress high-P/E stocks.”

Concern comes amid market jitters over Italian debt, attacks by politicians in Rome on Europe’s establishment

ROME—The end of Greece’s marathon bailout on Monday would mark the closure of the eurozone crisis—if only it weren’t for Italy, and nagging fears that the euro isn’t fixed after all.

European Union authorities will hail as a victory the completion of Greece’s financial-rescue program, an eight-year drama that triggered a wider European sovereign-debt panic. Greece’s economy has begun to grow again, although recovery has far to go. Defying many predictions, Greece has stayed in the euro, thanks to the strength of public support for keeping the currency, even amid one of the deepest economic depressions of modern times.

Meanwhile French President Emmanuel Macron, German Chancellor Angela Merkel and other EU leaders are discussing the next moves to bolster the currency union, building on various overhauls since the crisis.

Italy shows it might not be enough.

Renewed market tremors last week over Italian debt, and fresh verbal attacks on Europe’s establishment by politicians in Rome, suggests the specter of destabilizing capital flight from a eurozone country could return.

A first test will come this fall, when Italy’s new populist government must present a budget and explain how it will pay for its costly promises to voters.

“I am as serene as the rainbow,” parliamentary budget committee chairman Claudio Borghi tweeted on Aug. 13 as investors sold off Italian bonds. Either the European Central Bank will guarantee Italy’s debt, “or everything will be dismantled,” said Mr. Borghi, a euroskeptic economic adviser to Matteo Salvini, head of Italy’s nationalist League party.

A day later, the prime minister’s office sought to reassure investors with a statement pledging fiscal discipline.

EU authorities have drawn many lessons from bond-market breakdowns that nearly destroyed the euro in 2010-12. They have built safeguards ranging from a permanent bailout fund to centralized banking supervision. Leaders are haggling over an embryonic common budget for the eurozone.

But the causes of Europe’s debt crisis haven’t gone away.

The currency union facilitated massive capital flows during the 2000s from Europe’s economic core around Germany to its periphery. That fed credit bubbles that distorted national economies, then left whole countries gasping for liquidity when investors lost confidence and fled.

Advanced economies, which normally control the currency they borrow in, became as vulnerable to investor stampedes as emerging economies—such as Turkey—that borrow in foreign currencies.

The euro still feels like a foreign currency to some Italians. The euroskeptic Minister for Europe Paolo Savona has called it a “German cage.” During the crisis, the ECB acted to save Italy’s bond market from collapse only after Rome inflicted painful fiscal austerity to satisfy the central bank and Berlin.

The nativist League, part of Rome’s new governing coalition, feeds partly off lingering resentment about perceived German bullying.

ECB intervention in bond markets from 2012 onward, led by the bank’s Italian president Mario Draghi, was the key to ending the financial disintegration and saving the euro. Government-to-government loans were enough to bail out smaller countries such as Greece, Ireland and Portugal—but only the ECB has the firepower to defend Italy, with its €2.3 trillion ($2.6 trillion) national debt.

Mr. Draghi, who retires next year, famously vowed to do “whatever it takes.” But he also needed supportive political leaders in Berlin, Rome and other important capitals.

“Are we sure that the next ECB head will be willing to do that?” says Paul De Grauwe, one of Europe’s most prominent economists. “Are we sure the political configuration in Europe will allow it? We don’t really know.” In an age of voter backlash against Europe’s political establishment, he says, “the leading actors next time may not be as invested in saving the euro.”

Italy’s new governing coalition, comprising the League and the antiestablishment 5 Star Movement, dominates in opinion polls at the expense of Italy’s centrist establishment, which backed the austere fiscal policies in the crisis. Neither governing party advocates leaving the euro, but each contains vocal euro-skeptics and has in the past called for a referendum on returning to the lira.

“If markets are seen as punishing Italy, it could intensify political animosity against the eurozone,” says Mr. De Grauwe.

Optimists say Europe has made good progress in reducing one of the big reasons why the debt crisis escalated: the mutual dependence of banks and governments.

When government-bond prices plunged, inflicting losses on banks that held them, markets doubted that crisis-hit governments could afford to support their country’s banks, leading to more selloffs. Struggling banks choked off credit to their national economies, deepening recessions.

Europe’s new banking union, still under construction, aims to break the vicious circle. In future, the Europe-wide banking sector and its investors are to carry the cost of bank failures, rather than taxpayers.

“We may be closer to disentangling banks and sovereigns than is generally realized,” says Nicolas Veron, senior fellow at Brussels think tank Bruegel. “Even so, I would recommend going much further,” by deterring banks from owning too many of their government’s bonds.

Ideally, says Mr. Veron, bond markets would be able to punish governments for reckless policies, without capital flight spilling over into banks and the wider economy.

Others say the banking union isn’t enough. A banking crisis such as 2008 would overwhelm the sector’s limited new defenses, again burdening governments. Italy’s bond market is so big that a crash can’t be isolated from the economy, especially if linked to fears of a euro exit.

And the eurozone still lacks tools to fight recessions in countries where its brittle bond markets force governments to cut spending in a recession. The small eurozone investment fund envisaged by Mr. Macron and Ms. Merkel would be largely symbolic.

Ultimately the euro’s defense rests on the unwillingness of ordinary European voters to see their savings and livelihoods decimated in the chaos of a breakup, says Jacob Funk Kirkegaard, senior fellow at the Peterson Institute for International Economics in Washington.

“This is the key lesson of the Greek crisis,” he says. “Leaving the euro perhaps isn’t impossible, but the costs are so catastrophic that, politically, it’s unbearable.” That is why Greece turned back from the brink of exit in 2015.

“And Italy—a richer country with high savings that’s more deeply integrated into the European economy—has so much more to lose than Greece.”

An upward revision in data is spurring optimism about consumers’ ability to weather the next economic downturn

On the eve of the last two recessions, American households were unprepared. Years of appreciating stock portfolios, rising home values and improving job prospects had convinced consumers that they didn’t need to save much of their income.

So when unemployment rose and asset prices fell in the downturns that started in 2001 and in 2007, consumers drastically reined in spending and the economy contracted.

Until a few weeks ago, some economists feared history was in the process of repeating itself. Official numbers suggested saving was again out of style as the current expansion enters its 10th year.

Recent data has altered the picture. Households have been saving significantly more of their after-tax income for several years, according to revised data released last month by the Bureau of Economic Analysis.

Take just the first quarter of this year: The agency more than doubled its estimate of the personal saving rate–the difference between disposable income and spending—to 7.2% from the 3.3% estimated previously.

The new number exceeds the 6.4% average rate recorded since 1990, and is almost three times the most recent low of 2.5% in 2005.

The first-quarter changes alone amounted to $613.5 billion in additional savings, at an annual rate, recovered from between the statistical couch cushions—enough money to buy more than 20 million Ford F-150 pickup trucks or more than 600 million iPhone Xs.

While slight adjustments to economic data are common, the revision to the personal saving rate was the biggest since at least 2002.

“That was an amazing set of revisions,” said economist Joel Naroff, who until recently thought consumers were “largely tapped out” and represented a major risk to the economic outlook. Now, he says, the picture is “a lot less negative.”

It is likely that the 2007-2009 recession scarred consumers and left them more determined to sock away funds, economist say. It cost millions of jobs and debunked many Americans’ belief that the value of their homes would never fall.

“I don’t buy as much junk, you know, trivial stuff that doesn’t matter,” said Becky Groves, 61, a social worker who lives in Grand Junction, Colo. She said the financial crisis motivated her to save more in recent years. “I pay bills and buy food, and then I keep a little bit out and the rest just goes into savings.”

Bolstering the hypothesis is the fact that the revised saving rate shows virtually no decline since 2013, even though unemployment has fallen by roughly half and home and stock prices have risen sharply.

This contradicts “what was thought to be one of the more reliable regularities in macroeconomics,” the so-called wealth effect, said J.P. Morgan Chief U.S. Economist Michael Feroli. The theory holds that consumption rises and saving falls as household wealth climbs.

If the wealth effect observed before the Great Recession had played out in the years since, Mr. Feroli estimates that the saving rate would now be around 2% and that annual consumer spending would have grown about 0.5 percentage point faster than it did.

“There’s a little more frugality,” Mr. Feroli said. “Maybe people are a little more cautious, a little more aware that there can be rainy days.”

With household behavior defying some long-held conventions, economists are now puzzling out what the stronger saving trend means for consumer spending and economic growth.

Personal consumption rose at an annualized 4% clip in the second quarter, a rate that economists say is unlikely to be sustained as the immediate effects of Republican tax cuts wane.

Some economists now expect a more gradual spending slowdown than before the saving data were revised. Goldman Sachs foresees consumption rising at 2.4% a year through mid-2019, up from a previous forecast of 2%. The difference would amount to about $58 billion in extra spending on cars, health care and other goods and services.

Mr. Feroli isn’t changing his spending projections, but he said the saving revisions give him comfort households are less stretched than they were in the years before the last recession. That may imply a more resilient economy.

Others are more circumspect.

“The consumer may be on slightly stronger footing than we previously estimated,” said Lindsey Piegza, chief economist at Stifel. However, she said, consumption is driven fundamentally by jobs and incomes.

Wage growth, she warned, has been surprisingly modest given how low the unemployment rate has fallen. For that reason, she still sees a consumer-spending slowdown in the second half of this year.

It is also unclear whether lower- and middle-income households, which spend the vast majority of their incomes, are much better off than previously thought. Most of the newly discovered income that prompted the BEA’s revisions came in the form of interest, dividends or business owners’ profits, rather than wages.

This suggests the newfound savings may have been concentrated in wealthier households.

“The uneven distribution of income flows in this country may be shifting up the savings rate…But that doesn’t mean lower- and middle-income households are saving a whole lot of money,” Mr. Naroff said.

Wall Street Erases the Line Between Its Jocks and Nerds

There used to be a strict hierarchy: Traders made money and won glory while programmers wrote code and stayed out of sight. Those days are over.

Meet the straders.

Part risk-taking trader and part computer-whiz “strategist,” they are prowling the halls at Goldman Sachs Group Inc., GS 0.16% erasing a once-religious line between the jocks and the nerds.

“You say ‘trader’ and I don’t even know what we’re talking about,” said Adam Korn, a 16-year Goldman veteran. “Everyone who comes to sales and trading needs to know how to code.”

Mr. Korn is the unofficial king of the straders, and an evangelist for the financial world they represent. Across Wall Street, traders who spent their formative years barking into phones are signing up for coding classes. Engineers once relegated to the back office are being empowered to try their hands in the market.

It is upending the pecking order of the trading floor and is, in large part, a concession to the reality that has set in a decade after the financial crisis.

Wall Street traders buy and sell everything from stocks and bonds to bundled credit-card debt and oil. Before the 2008 meltdown, they thrived on instinct and an informational edge. They worked the phones, sussing out which customers were hungry and which ones were desperate, and pounced on weakness. “There’s blood in the water,” Morgan Stanley chief John Mack would tell his traders. “Let’s go kill.” They did, and were richly rewarded for it.

Those days are largely gone. Today, snippets of code, sometimes called algorithms, do much of the job of a trader. They keep tabs on the banks’ positions, generate price quotes for clients, match buyers and sellers, and flag unseen risks.

They are increasingly doing the job of a salesman, too: The latest software can suggest which clients might be interested in a particular stock or bond by analyzing their recent investments, the same way Amazon.com can suggest items inspired by a customer’s purchases

The rise of automation is partly a response to the financial crisis and the rogue trading scandals that followed, which encouraged banks to take discretion away from error-prone and ego-driven humans. It owes partly to a talent war between Wall Street and Silicon Valley, with banks eager to stress their tech bona fides.

It is also a response to the rise of computer-driven “quant” funds. These investors ignore traditional stock-picking methods and instead hunt for patterns in the market that signal a buying or selling opportunity. When a bank like Goldman comes calling, these clients more often want to talk about data processing than, say, dairy production. “Being able to speak that language” is important, Mr. Korn said.

For traders, succeeding in this world depends less on trusting one’s gut than being able to interpret what the computer is spitting out—and what ought to be fed in. “Think of it like cruise control,” said Matt Cherwin, a trading executive at JPMorgan Chase & Co. “It can make the car go 55 miles an hour, but someone needs to decide, ‘well, is that the right speed?’”

Tech whizzes aren’t new to Wall Street. They arrived in the 1980s to computerize the trading floor and program mathematical models that could value new, complex instruments known as derivatives. The code they wrote predicted how a drop in the U.S. dollar might affect corn prices, for example, or how to value a loan to Ferrari if the Italian government raised interest rates.

But these programmers were distinct from—and distinctly subordinate to—traders, who used their models to decide how much corn or Ferrari debt to buy or sell. “Strats,” as they came to be known at Goldman, crunched numbers. Traders made money.

On Goldman’s stock-trading floor in lower Manhattan, strats were relegated to a corner. Today they don’t just sit with traders. Increasingly, they are the traders, licensed and empowered to put the bank’s capital on the line.

Their rise mirrors what is happening in the broader economy. Technology can displace workers, particularly in rote tasks like factory production. But more often, it changes what’s expected of them, thrusting employees once confined to the back office into front-of-the-house roles and forcing those already there to adjust.

Tax software has automated much of the grunt work for accountants, who are now rebranding themselves as trusted advisers, not bean counters. Architects have ditched their slide rules for computer software, but big buildings don’t get constructed without them.

On Wall Street trading floors, quick thinking under pressure and a deep rolodex are still prized. So traders haven’t been replaced by technologists so much as merged with them—the “strader” hybrid on the rise at Goldman.

“Ten or 15 years ago, the engineers were the ones who didn’t speak to anyone and maybe seemed like they hadn’t showered that day. The traders were the ones that looked like they stepped out of a Brooks Brothers catalog,” said Oliver Cooke, a financial-industry recruiter at Selby Jennings. “That line has basically disappeared.”

It’s not just the fashion. Trading floors were once a cacophony of orders being shouted and phones being worked, and occasionally thrown. Today they’re surprisingly quiet, said Steve Grob, director of group strategy at Fidessa, which sells trading systems to banks. “Much less shouting, and much more thinking,” he said. “If you put someone in a time machine from 2006, they would be amazed.”

At Citigroup Inc., traders work alongside coders from the bank’s quantitative analysis group. But in June, traders themselves were offered a three-day introductory course in Python, a coding language. The offering proved so popular—even veteran traders were willing to be away from the floor for three days—that the bank plans another session in September, and is also considering a hybrid technology-trading training program.

“The tools continue to evolve, and continue to become more sophisticated,” said Lee Waite, Citigroup’s former head of North American markets, who is now the bank’s country head for Japan. “That has us thinking about the future of trading, and what sort of person we need in those roles.”

Goldman started offering free computer-programming classes to its trading staff last year through edX, an online classroom.

“Programming is going from a ‘nice-to-have’ to a ‘must-have,’” Mr. Korn said.

An applied math and economics double-major at Brown University, he comes from a family of computer geeks: His father worked at Bell Labs and in the 1980s helped develop the backbone of the Unix operating system. He came to Goldman in 2002 and spent his early years as a strat in stock-trading, among those stuck in the corner on the 50th floor of New York Plaza.

That began to change in the early 2000s. The stock market became increasingly electronic, setting off an arms race for code that would give banks an edge. Strats weren’t only building trading models, but entire trading systems.

One early piece of software at Goldman split a big order to smaller pieces and routed them off to different exchanges. They called it “V.I. Joe,” short for Virtual Joe, a nod to the human whose job it did. Today, it’s a standard order-management system, and every bank has one.

The “flash crash” of 2010, when the stock market lost and then recovered $1 trillion of value in minutes, added to the concern. Across Wall Street, traditional traders were mostly helpless, while the engineers best equipped to explain the whipsaw weren’t in a position to do anything about it.

Some executives are wary of blurring the roles too much, worried that a few lines of glitchy code written by a relative novice could wreak havoc. Firms as big as Knight Capital Group have been brought down by computer snafus.

And remember the rogue traders that cost JPMorgan and UBS Group AG billions of dollars? A rogue coder, deliberately planting snippets meant to siphon off funds to a personal account or blow past risk limits, could be just as dangerous.

“There must be a clear delineation of responsibility,” said Mike Dargan, group chief information officer at UBS. On the Swiss bank’s markets desks, “scrum teams” of traders and coders collaborate to quickly to roll out new functions, but aren’t encouraged to start to do each other’s jobs.

“We want traders to be educated” about how their software works, Mr. Dargan said. “But we want them trading.”

Regulators have raised similar concerns. In 2016, the Securities and Exchange Commission changed its rules to require anyone responsible for designing or overseeing a trading algorithm to become licensed as a “securities trader.” That industry designation separates people who are empowered to put a firm’s capital at risk from those who aren’t, and holds them accountable for positions they take on.

The SEC was trying to limit screw-ups or malfeasance stemming from the knowledge gap between people who write the code and those responsible for managing the market risk that code generates.

Mr. Korn took the required exams, sending his wife and young children on vacation for a week so he could study. He proposed a new role to his bosses at Goldman—strader—and they went for it. That working title has been replaced by the more approachable “traders who code,” and today the bank employs about 200 of them.

Among them: Joe Montesano, whose order-routing job was programmed into “V.I. Joe” back in the 2000s.

That could be changing. Other than Amazon, exposure to the FANG stocks declined in the second quarter for the 50 largest hedge funds, according to data from FactSet Research. Hedge funds decreased their exposure to Facebook and Netflix by $1.2 billion each and sold about $1 billion worth of Alphabet shares.

Bridgewater Associates, the world’s largest hedge fund, sold 156,72 shares of Facebook, reducing its stake from $32.8 million to $9.4 million at the end of the second quarter, according to regulatory filings. Bridgewater also initiated a small position in Amazon, and bought shares of Chinese internet firms Alibaba Group Holding and Baidu.

Amazon remained popular, with the group adding stakes worth a total of $1.6 billion.

Overall, tech is still a mainstay for the hedge funds. The market value of tech stocks held by the 50 largest funds grew by more than $8 billion in the second quarter, exceeding every other sector. Most popular was Spotify Technology. Funds built a $3.5 billion stake in the music-streaming service, led by Tiger Global Management.

Apple wasn’t one of the original FANGs but it, too, remains popular, with hedge funds adding $1.3 billion worth, and Renaissance Technologies plowing $800 million into the shares.