MW These 4 market sectors look frothy - and Nvidia's isn't even the biggest bubble

By Mark Hulbert

S&P 500 has a 30% chance of crashing over the next two years. That's the good news.

The S&P 500 doesn't appear to be in a bubble currently, but some specific industries look overextended.

Four major U.S. industries are in bubbles that could crash at any time. That's the implication of a seminal study, entitled "Bubbles for Fama," which challenges University of Chicago professor Eugene Fama's famous claim that bubbles cannot be identified in advance.

The authors of this study found evidence to the contrary. A bubble and its subsequent bursting becomes increasingly likely as an industry's trailing two-year return grows. The study's authors defined a crash as a drop of at least 40% over the subsequent two years.

According to their calculations, an industry has a 53% probability of crashing when, over the trailing two years, it outperformed the S&P 500 SPX (its "alpha") by at least 100 percentage points. This probability rises to 76% when an industry's trailing two-year alpha is 125 percentage points, and to 80% when its trailing two-year alpha is 150 percentage points.

This correlation between crash probability and trailing two-year return is plotted in the chart above. The implications are alarming, since there currently are four industry groupings within the S&P 1,500 index that have trailing two-year alphas of at least 100 percentage points. The alpha of one of them is 148 percentage points, which suggests a close to 80% probability of a crash. (Returns calculated through May 15.)

You might expect semiconductors to be the industry with such a high probability of crashing, since Nvidia (NVDA) represents a big part of it. That stock is the poster child of the AI trade, which some commentators claim is in a bubble.

In fact, the industry with the greatest trailing two-year alpha is electronic components; its two largest constituent stocks are Corning $(GLW)$ and Amphenol $(APH)$. This industry has produced a 190.4% cumulative return over the trailing two years - 147.5 percentage points ahead of the S&P 500's 42.9% cumulative return - putting the odds of a reversal close to 80%, according to the research. The construction and engineering subsector, with a 123.9 percentage-point outperformance, would have almost the same crash odds. The two biggest stocks here are Quanta Services $(PWR)$ and Comfort Systems USA $(FIX)$.

Semiconductors, meanwhile, with a 100.5 percentage-point cumulative two-year return, currently carry crash odds of 53% - essentially a coin flip.

The table below lists the four S&P 1,500 sub-industry indexes with trailing two-year alphas of at least 100 percentage points, along with the two largest-cap stocks within each.

Is the overall market forming a bubble?

Because the study into bubbles focused on industries, it doesn't directly address whether the overall stock market is in danger of a crash. But State Street Markets has used the research to create a series of "froth forecasts." According to the latest reading, the S&P 500 has a 30% probability of crashing over the next two years. That's only marginally higher than the average over the past five years, which is 26%.

The bottom line? While the S&P 500 does not appear to be in a bubble currently, a handful of specific industries may well be.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

Also read: Nvidia's earnings will play second fiddle to these big investor debates

More: Three ways the AI boom may fizzle - and what happens to stocks next

-Mark Hulbert

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May 18, 2026 15:31 ET (19:31 GMT)

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