Financial Planning & Wealth Management

Is the US in a Bubble

The chart below shows the performance of the Magnificent 7 stocks in 2023 and 2024—Google, Amazon, Tesla, Nvidia, Facebook, Apple, and Microsoft. These companies have been the primary drivers of market gains over the past two years.

These stocks have significantly outperformed the global index, as represented by the MSCI ACWI and the ACWI Equal-Weighted indexes. The top 10 stocks in the S&P 500—which include all of the Magnificent 7—now make up 39% of the entire index, giving it an increasingly concentrated weighting toward this group.

 

For nearly a decade, market commentators have called these stocks “too expensive.” Yet they continue to generate massive earnings growth, with high margins, strong return on capital, and huge cash reserves, all while their stock prices continue to climb.

 

After almost 15 years of exceptional returns from U.S. equities—particularly in tech—the question now is: Are we in a bubble?

 

Some data points suggest caution:

 

  • Valuations: Key metrics indicate these companies are expensive compared to their historical valuations, with prices stretched to levels we haven’t seen since the dot-com bubble—just before that market crashed. Investors are paying a premium, banking on continued rapid growth.
  • Size Concerns: These companies are so large that sustaining double-digit earnings growth becomes increasingly difficult. They also make up an outsized portion of the entire market, meaning their high valuations could be dragging the broader market into overvaluation territory.
  • Uncertainty: With the start of a new U.S. administration, potential policy shifts add to the risk. Inflation could also resurface, creating additional headwinds.

 

Despite these concerns, U.S. large-cap tech continues to dominate, and show no sign of slowing.

 

Here’s another way of looking at it.

 

The chart below ranks global stock market sectors by performance from 2015 to 2024. Large Cap (representing the U.S. tech giants) has been the top-performing sector in 5 of the last 7 years, including the last three years in a row.

Source: Ben Carson

 

Based on the above chart, it seems reasonable that this trend should continue. It makes intuitive sense. Of course the large US companies should dominate returns. Of course, emerging markets are going to underperform. And yet, if we look a bit further back, this is not quite correct.

 

Markets are cyclical

 

But markets move in cycles, and no sector leads forever. Look at the same chart from 2000 to 2009:

Source: Ben Carson

 

 

During that decade, emerging markets and commodities were the big winners, while U.S. large caps barely broke even. I remember the JSE was giving you close to 20% per year between 2000 and 2008.  It also made complete sense. 

 

Fast forward to the next decade, and the tables have turned—emerging markets and commodities now have lost a decade, while U.S. large caps have flourished.

 

The lesson? Markets are cyclical. The dominance of any one sector rarely lasts forever.

 

Are Valuations Too High?

 

The chart below compares U.S. growth stock valuations today with those of the dot-com era—a period that led to one of the few lost decades in U.S. market history (a decade of zero returns). I wrote about the dot-com bubble hereThat era was wild.

 

Looking at the data, you’ll notice that the P/E ratio peaked at around 50 just before the dot-com crash. The long-term average for the U.S. market sits closer to 20. That says that just before the 2000 crash, the market was trading at 250% the long term average valuation. That’s insanely overpriced.

Today, the P/E ratio is closer to 30—about 50% higher than the long-term average. That’s still expensive, but no-where near what it was back in 2000.

 

More importantly, today’s companies are fundamentally different from those of that time. We’re looking at real businesses with strong earnings, not just speculative bets based on clicks and views.

 

The Problem with calling this a Bubble

 

Broadly speaking, the trouble with a full-blown “this is a bubble” diagnosis is that the term bubble implies people are making money primarily from low-quality businesses or Ponzi-esque investments. While those exist, the bulk of the gains in this era have come from arguably some of the highest-quality companies that have ever existed.

 

Are you paying up for them? Absolutely

 

Are they tulips? Not really

 

I might be right, and I might be wrong. But basing an investment decision on a single prediction like this would be a mistake. Instead, your strategy should be designed to weather any market storm.

 

We know that black swan events happen repeatedly. Whatever causes the next bubble and crash, I’m confident no one will see it coming. And when (not if) it does, your strategy should be built to withstand the shock and keep you on course.

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About

 MattFin is a blog that focuses on wealth management, investments, financial markets and investor psychology. I build financial plans and portfolios for families and individuals

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