Worries that we’re in a stock market bubble have grown alarmingly over the past few weeks. The artificial euphoria Turing’s incarnation – all related equity markets and indices are soaring to new historic highs. Recent, high-profile deals with household names such as Nvidia and OpenAI have made waves. Most analysts think that these major players might be temporarily propping up the market. The S&P 500 is on a historic run driven largely by positive earnings surprises. Perhaps even more than other recent surges, experts warn that this rally isn’t likely to last.
The recent dramatic changes affecting AI companies have been almost universally praised. OpenAI on Tuesday made a splashy announcement of a new partnership with Advanced Micro Devices (AMD). In reaction, AMD’s stock price rocketed almost a quarter—almost 24%! This collaboration highlights the increasing impact of AI on the market overall and its looming ability to accelerate earnings going forward. Many analysts warn that these drastic increases may be signs of an overheated market.
Warning Signs Emerge
Just ask Alan Greenspan, former Chairman of the Federal Reserve, who first warned of “irrational exuberance” back in 1996. Now, some of his most prescient warnings have come home to roost. Stalwarts like Ed Yardeni are already asking whether today’s market mood reflects the environment that created the late 1990s tech bubble.
“Is the stock market back on the road to the same irrational exuberance that inflated the Tech Bubble of 1999, which was followed by the Tech Wreck of the early 2000s? Perhaps.” – Ed Yardeni
Greenspan’s famous warning in 2000 that the stock market was getting ahead of itself still rings true today. At that time, Mr. That foresight created a lot of excitement and interest from investors who were hoping to see history repeat itself. Here’s Mike Mullaney of Dillon, Read Advisors on the current feel of the market. He warns that it’s getting very close to “bubble light” territory, meaning that valuations are starting to stretch but investors haven’t yet completely acknowledged this reality.
The Bank of England also chimed in, expressing concerns about equity market valuations, particularly in technology sectors focused on AI.
“On a number of measures, equity market valuations appear stretched, particularly for technology companies focused on artificial intelligence.” – The Bank of England
Evaluating Market Dynamics
So far this year, the S&P 500 has climbed to record levels, largely on the back of good earnings news by big name companies. Yardeni Research set an ambitious target for the S&P 500 to hit 7,700 by the end of next year, underscoring the optimism surrounding AI and its economic impact. Analysts have underscored that this rally is driven on the back of impressive earnings from the widely held mega-cap names. In sharp contrast, the tech boom of the late 90s was marked by unprofitable startups.
What Eric Freedman touches upon in his piece is this critical distinction. He notes that today’s rally is being driven by strong earnings rather than speculative bets on nascent companies.
“Unlike the 1990s tech bubble that featured soaring stocks from unprofitable early-stage companies, strong mega-cap company earnings are driving this year’s rally.” – Eric Freedman
While this growth is certainly encouraging, it begs the question of long-term sustainability. IMF chief Kristalina Georgieva cautions that today’s valuations are approaching the levels of the internet boom. Beyond the grand implications, she raises a valid concern about what will happen if market sentiment around AI loses its glow.
“Today’s valuations are heading toward levels we saw during the bullishness about the internet 25 years ago.” – Kristalina Georgieva
The Role of Sentiment and Expectations
Investors, including institutional investors, are pushing prices up and making it happen. Understanding the difference between a sustainable rally and a speculative bubble is key. A potential bubble occurs when prices exceed intrinsic value, which can lead to a sharp correction and broader economic implications. Georgieva cautions that if such a correction were to happen, the resulting tighter financial conditions could pull global growth down with it.
“If a sharp correction were to occur, tighter financial conditions could drag down world growth.” – Kristalina Georgieva
The current market environment is as much a product of the challenging balance between enthusiasm around AI’s accelerating productivity-enhancing potential and concern over sky-high valuations. Mullaney nails that feeling perfectly and adds, despite the signs pointing to bubble-like behavior, the euphoria among investors just hasn’t happened yet.
“Valuations, positioning and flows are all certainly signaling that we’re in bubble light territory, but sentiment has just not got there yet.” – Mike Mullaney