U.S. Stock Market: Bubble or Bullish? Perspectives Vary

The U.S. stock market has been on a tear, with the S&P 500 gaining 24% in 2023 and 23% in 2024. However, the question on many investors' minds is whether this remarkable performance is a sign of a healthy market or a bubble ready to burst. The answer, it seems, depends on who you ask.



On one hand, some analysts argue that the U.S. stock market is in a bubble, with valuations at lofty levels and a small number of stocks driving the majority of gains. The "Magnificent Seven" stocks—Apple, Microsoft, Amazon, Alphabet, Meta, NVIDIA, and Tesla—accounted for 53% of the S&P's returns in 2024, and their combined market capitalization now exceeds one-third of the S&P's total market capitalization. This concentration of gains in a few stocks is a common characteristic of market bubbles (Source: Financial Times article).

Moreover, the enthusiasm for artificial intelligence (AI) has drawn parallels to the dot-com era, with investors pouring money into AI-related stocks without regard for fundamentals. For instance, NVIDIA's stock price has risen by 833% since the beginning of 2023, driven largely by AI-related demand (Source: Financial Times article).



On the other hand, some investors remain bullish on the U.S. stock market. They point to the strong earnings growth of U.S. corporations, particularly the tech giants, and the massive government spending that has boosted the economy. Additionally, the balance sheets of U.S. households and companies are in good shape, which could support continued economic growth and corporate profits.

However, every hero has a fatal flaw, and for the U.S., it is the sharply increasing addiction to government debt. According to calculations by Ruchir Sharma, chair of Rockefeller International, it now takes nearly $2 of new government debt to generate an additional $1 of U.S. GDP growth—a 50% increase on just five years ago. Investors have been willing to overlook this issue so far, but there is a risk that they will eventually demand higher interest rates or a demonstration of fiscal discipline, which could undermine economic growth and corporate profits.

In conclusion, whether the U.S. stock market is in a bubble or simply experiencing a bullish run depends on one's perspective. Some analysts point to lofty valuations and concentration of gains in a few stocks, while others highlight the strong earnings growth and government spending that have supported the market's remarkable performance. Ultimately, investors must weigh the risks and opportunities and make their own decisions about the market's trajectory.