“Wall Street strategist who called dotcom crash says stocks are in a bubble driven by Fed,” headlined MarketWatch recently. It sounds alarming, but the warning comes from Societe Generale’s Albert Edwards, who has famously been bearish for most of the last 25 years.
Still, Edwards isn’t alone in his concern. Sceptics see various indicators of excess, ranging from cryptocurrency speculation (the meme coin Dogecoin has doubled this year) to the number of all-time highs (the S&P 500 hit 22 in the first quarter alone) to the pace of gains (five-month gains of 25 per cent).
There are some signs of froth. Hedge fund exposure to momentum stocks has reached all-time highs. Citigroup’s stock sentiment model is in the euphoria zone. Barclays notes CNN’s fear/greed indicator is in extreme greed territory. Retail sentiment is unusually bullish. Positioning is “high”, says Barclays.
However, “not all investor types are ‘all in’”, says Barclays, with overall equity exposure still not extreme. Outperformance of AI stocks such as Nvidia is supported by earnings growth, while there is “increased dispersion” within the so-called magnificent seven stocks.
That point is also made by S&P analyst Howard Silverblatt. Apple and Tesla’s share price weakness means the magnificent seven has now become the “fantastic four” (Microsoft, Nvidia, Meta and Amazon).
Despite recent gains, US index performance over the past two years is still below average, says Bespoke Investment, which also notes there has only been one all-or-nothing day (days where most stocks rise or fall together) in 2024. That suggests investors are being discriminating – not the kind of thing one sees in bubbly environments.
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