MW As stocks soar, talk of a bubble is making a comeback on Wall Street. Should investors be worried?

By Joseph Adinolfi

The 'B word' is back in the conversation, analysts say

As cryptocurrencies and shares of unprofitable and highly shorted stocks soar, talk of a bubble forming in financial markets has again started to percolate on Wall Street.

"The 'B' word has entered the conversation, and that is a pivotal event. Three decades of experience tells us that when the media begins reporting about 'Bubble' risks, you are already in one," Michael O'Rourke, chief market strategist at Jones Trading, said in commentary recently shared with MarketWatch. He was referring to an article in the Wall Street Journal that spotlighted some signs of bubblelike activity in markets.

Looking across the landscape of U.S. financial markets, investors can find plenty of reasons to feel uneasy. The S&P 500 SPX has risen nearly 30% since its April 8 closing low. According to Chris Galipeau, senior market strategist at the Franklin Templeton Institute, the market has speed-run about three years' worth of returns in just a few months.

The top-performing stocks in the Russell 3000 RUA have racked up huge gains despite those companies reporting scant or nonexistent profits. The 10 largest stocks in the S&P 500 account for nearly 40% of the entire value of the index, according to Goldman Sachs Group, making the index more concentrated than at any time in recent memory. Meme stocks are making a comeback.

An 'everything bubble'?

O'Rourke is hardly the only one on Wall Street to suggest that speculative froth appears to be reaching a fever pitch.

He added that the proliferation of cryptocurrency-treasury companies over the past six weeks has been among the more reckless signs of speculative activity. Instead of a sustainable business model, these companies raise money to buy cryptocurrencies like bitcoin to hold on their balance sheets.

Michael Hartnett at Bank of America Global Research recently pointed to signs that suggest a late-stage bull market might be nearing its peak.

The Trump administration's push to allow retail traders to invest in private-equity funds via their 401(k) retirement accounts is one example. Finra's proposal to lower minimum account requirements for day traders is another.

"Bigger retail, bigger liquidity, bigger volatility, bigger bubble," Hartnett wrote in a report.

Société Générale's Albert Edwards has taken things one step further, warning that an "everything bubble" appeared to be taking shape in the U.S. and pointing to stocks and housing as especially exposed.

However, Edwards has been warning about a bubble for some time.

As for what might trigger the great unraveling, as Edwards called it, he is casting a wary eye toward Japan. Rumblings in the Japanese financial plumbing could signal tough times ahead for global markets, he said. On Wall Street, analysts have argued that high valuations for large-cap U.S. stocks, relative to history, are justified by the superior earnings growth of the world's largest technology companies. To Edwards, that smacks of the justifications put forth by some - notably, American economist Irving Fisher - just before the 1929 stock-market crash.

Underscoring Edwards's sense of concern is the fact that the U.S. hasn't suffered an economic downturn driven by fluctuations in credit or the business cycle since 2007. That means nobody under the age of 40 working in finance today has experienced what he would consider a typical recession. The brief downturn in 2020 was driven by an exogenous shock - the COVID-19 pandemic.

Google searches for 'stock bubble' jump

Callie Cox, chief market strategist at Ritholtz Wealth Management, acknowledged the bubble talk in a recent edition of her newsletter, OptimistiCallie. She pointed out that Google searches for the term "stock bubble" recently hit their highest level since early 2021, when the original meme-stock mania was in full effect.

That said, Cox noted that determining with any certainty whether markets are in a bubble is exceedingly difficult without the benefit of hindsight. O'Rourke, meanwhile, had a slightly different take: Just because someone has spotted a bubble doesn't mean its end is imminent.

'Nowhere close' to the late 1990s

If the market is in a bubble, how does it stack up against past bubbles, like the dot-com craze that peaked in early 2000?

Que Nguyen, chief investment officer of equity strategies at Research Affiliates, said that while pockets of exuberance can be found, overall the situation isn't anywhere near what investors witnessed during the dot-com days.

"There are pockets of exuberance today that aren't fundamentally sound," she said. Cryptocurrency-treasury companies are one example.

"But if you compare what's going on in markets now to the late 1990s, I would say it is nowhere close," Nguyen said during an interview with MarketWatch.

Back then, speculative activity became deeply rooted in swaths of the equity market. So when the crash finally came, major equity indexes like the S&P 500 and Nasdaq Composite COMP were severely impacted.

While Nvidia Corp. (NVDA) might be expensive based on its multiple - the stock was trading at 35 times its forward earnings on Wednesday, compared with roughly 22.5 times for the S&P 500, according to FactSet data - Nguyen said this is at least partially justified by the fact that Nvidia is a hugely profitable business.

Others see these Big Tech stocks as being closer to bubble territory. Rob Arnott, founder and chair of Research Affiliates - where Nguyen also works - has been beating the drum about a bubble forming in the technology sector for some time now.

Skeptics of the artificial-intelligence boom certainly have grounds for pessimism. So far, few companies have shown that they can turn their AI offerings into a profit center, Nguyen said. Meanwhile, the huge pay packages being negotiated by some AI engineers have been perhaps one of the clearest signs of excessive exuberance.

Still, she expressed confidence that, eventually, AI would produce a "killer app" that will make a company, or a handful of companies, a lot of money. Meanwhile, she said, the debate over whether markets are in a bubble risks missing the point.

History has shown that markets don't necessarily need to be in a bubble for them to crash hard, Nguyen said. Few were arguing that stocks were in a bubble when the global financial crisis hit. That didn't stop the S&P 500 from shedding half its value between October 2007 and March 2009, FactSet data showed.

Looking ahead, the biggest risk to the market right now isn't the fact that unprofitable stocks have soared in 2025, or that meme-stock trading is making a comeback. Or that Palantir Technologies Inc. (PLTR) is trading at more than 200 times its forward earnings. Or even that cryptocurrencies keep trucking higher, despite offering investors no dividends or cash flows to speak of.

It is the risk that President Donald Trump's tariffs could revive inflationary pressures while tamping down economic growth, Nguyen said. The first reading on second-quarter gross domestic product, released on Wednesday, showed the economy grew at a robust pace of 3% annualized. But signs of weakness persist under the surface. An increase in consumer spending appeared to be driven by people buying cars ahead of the tariffs. Businesses, meanwhile, cut spending on buildings while rolling back production.

Investors will get the latest update from the Federal Reserve's preferred inflation gauge, the PCE price index, later this week.

-Joseph Adinolfi

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

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July 30, 2025 16:08 ET (20:08 GMT)

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