Is the Bubble About to Burst

Nobody knows whether the stock market will rise or fall over the next few months. Opinions, however, are never in short supply. Right now, both bulls and bears have strong arguments.

The bears are warning.

The market value of the U.S. stock market has reached a record high relative to economic output. This indicator became famous thanks to U.S. investor Warren Buffett, who used it to draw attention to the stock market’s overvaluation at the end of the 1990s. Today, the figure is even above the peak reached during the stock market bubble in 2000.

Would you like a few more gloomy statistics? The market is not rising across the board. The number of stocks hitting new highs is large, but so is the number of stocks hitting new lows. Historically, that has been a negative signal for the market. On top of that, the important U.S. S&P 500 Index was last this far above its long-term trend in 1929. The fact that inflation, along with bond yields, has risen again does little to lift the mood.

But before you rush to enter sell orders, hold on for the positive arguments.

The bulls are celebrating.

Even though, as mentioned above, the value of the stock market is high relative to economic output, the bulls will point out that corporate profits are also at a record high relative to the economy. Analysts also expect double-digit earnings growth next year.

Stock market peaks are reached when optimism becomes euphoric. Put a little more sharply, everyone is already invested, and there are no buyers left. Yet whenever U.S. consumers have been very negative about their own economy in the past, the stock market has gone on to deliver surprisingly positive results. In early 2000, true consumer euphoria could be measured. Today, by contrast, consumer confidence is at a record low, an excellent contrarian buy signal.

Developments around artificial intelligence are firing the imagination and frightening people at the same time. Perhaps that explains the wide range of arguments.

What matters is keeping your head when everyone else is losing theirs. Those who invested exclusively in internet stocks in 2000 suffered a permanent loss of capital. Those who resisted the frenzy and remained diversified across themes and sectors also had an unpleasant time in the bear market that followed, but their portfolios eventually reached new highs again.