Stock-Market Bubble Watch: What’s Still Missing?

The apparent absence of a crucial element seen in most past peak bubbles suggests that U.S. stocks are not presently in a bubble, as per analysts at TS Lombard. Unlike prior bubbles, today’s market lacks significant leverage. Despite appearing overvalued, particularly in sectors like technology, financial, and healthcare, margin debt has scarcely increased since the recent bear market ended in October 2022.

Additionally, the ratio of margin debt to the market capitalization of the S&P 500 has actually decreased as stocks have risen.

While valuations are elevated, especially in technology, financial, and healthcare sectors, they are supported by strong earnings growth, particularly among major corporations.

The market’s focus on a few mega-cap companies like Nvidia, Apple, Microsoft, Amazon, Meta Platforms, and Alphabet has fueled substantial appreciation in their market capitalization, leading to a more concentrated market reminiscent of the dot-com era.

Despite concerns about leverage, other indicators such as market breadth have shown signs of improvement. Nevertheless, debates persist regarding the role of options trading in propelling stock prices higher, with TS Lombard noting that recent volumes remain below levels associated with previous market bubbles.

This viewpoint is consistent with other analysts, including Ray Dalio of Bridgewater Associates, who recently argued against the notion of a stock market bubble. As markets rebounded from a tech-led selloff, U.S. stocks displayed resilience, with both the S&P 500 and Nasdaq Composite trading higher.