Booming Market Or Risky Bubble? The Wall Street Is Splitting On The Recent Surge
Is a bubble forming in the U.S. stock market? The answer depends on who you ask.
For Marko Kolanovic, chief market strategist at JPMorgan Chase, the sharp rises in U.S. stocks and Bitcoin quickly breaking the $60,000 mark suggest that the answer is yes. He believes these increases show that a bubble is accumulating in the market — something that typically occurs ahead of bubble periods when asset prices rise at an unsustainable pace.
Warnings from Wall Street are rapidly heating up, and Kolanovic has joined the ranks. These warnings harken back to the Internet bubble of the late 1990s and the frenzy following the 2021 pandemic when stock prices soared rapidly before plummeting.
At the same time, some argue risking sentiment is justified, including Goldman Sachs' David Kostin who believes the high valuations of large tech companies are supported by fundamentals.
With the S&P 500 continuously making new highs driven by surges in U.S. tech giants, critics are decrying the unsustainable trend, while optimists are exhilarated, believing there's more room for gains.
Kolanovic is a key character in the former camp. He wrote in a report to clients on Monday that the market is moving forward with lower volatility and a bubble in formation.
Equities have moved up this year, even as bond yields rose and rate cut expectations unwound, he noted. Investors may be assuming that the increase in yields is reflective of economic acceleration, but earnings projections for 2024 are coming down and the market appears too complacent on the cycle.
By contrast, Goldman's Kostin suggests things are different this time around. Unlike previous instances where stock prices have swung wildly, often exceeding their value, this time the breadth of extreme valuations is much more limited, with far fewer stocks reaching extreme multiples than at the 2021 peak.
Big hitters in U.S. stocks, particularly Nvidia, Meta Platforms Inc., and Microsoft, have led the way this year, driving major indices up. The S&P 500 has hit 15 record closes in 2024, posting gains for four consecutive months.
So far, financial performance validates the rise. Compiled data shows these companies' earnings per share totaled a 59% year-on-year increase in the fourth quarter, against predictions of 47%.
But to Kolanovic, this environment is perplexing, reflecting investor complacency and an underestimation of risk.
The persistent rise in stocks may keep monetary policy higher for longer, as premature rate cutting risks further inflating asset prices or causing another leg up in inflation, he posited.