Commonwealth Bank of Australia (ASX: CBA) shares have risen 40% over the past year, puzzling many investors and analysts. 

Australia's largest bank is often perceived as a safe haven due to its superior capital position, relative to its peers. This makes its dividends more sustainable. Reliable passive income is a priority for many ASX investors, making CBA especially popular.

CBA shares now account for around 12% of the S&P/ASX 200 Index (ASX: XJO). The company also recently became the first ASX-listed company to reach a market capitalisation of $300 billion. 

However, alongside the meteoric rise of CBA shares have been repeated warnings from analysts that they are overvalued. In a 17 June research note covering the Australian Banks, broker Macquarie Group Ltd (ASX: MQG) affirmed its price target of $105 on CBA shares and an underweight rating. CBA shares are currently changing hands for $179.63, suggesting that the ASX 200 bank stock is materially overvalued.

Could they keep rising?

However, a recent article in the Australian Financial Review described the conditions that could see CBA shares rise further. 

It referenced the shift in capital markets over the past 15 years. 

About 15 years ago, retail investors owned 56% of CBA's share register. By 2023, that dropped to 51%. Since then, it has fallen to 47% at the end of March this year. 

According to the Australian Financial Review, retail investors can be especially sticky (reluctant to sell). This is especially likely if they have significant capital gains, as selling those shares would require paying capital gains tax. Anyone who has bought CBA shares in the last few years is likely to sit in that category. Therefore, although their relative ownership slice has fallen, retail investors are unlikely to sell anytime soon.

While retail participation has declined, passive ownership (a buy and hold strategy) has increased. As the article points out, when passive fund manager BlackRock first invested in CBA in 2017, index funds owned just 18% of CBA. Today, that figure has risen to nearly 30%. 

Meanwhile, it is estimated that active fund managers own just 8% of the total CBA shares outstanding. Therefore, while most fund managers consider CBA shares to be materially overvalued, this group of investors only accounts for a small portion of the registry. 

For example, actively managed listed investment company WAM Leaders (ASX: WLE) is underweight CBA, according to its May update.

Where to now?

CBA shares are currently trading at a price-to-earnings (P/E) ratio above 30, making them the most expensive banking stock in the world. By comparison, JP Morgan Chase (NYSE: JPM), widely considered to be America's highest-quality bank, is trading at a P/E ratio of around 13.However, according to the Australian Financial Review, these conditions could drive CBA up further.

This buying vortex has pushed CBA into bubble territory. We believe if this 'long-only' squeeze and movement to passive investing continues, the CBA bubble could potentially inflate. Bubbles have a tendency to expand far further than people anticipate, especially when driven by flow.