A trader blows bubble gum during the opening bell at the New York Stock Exchange (NYSE) on August 1, 2019, in New York City.Johannes Eisele/AFP via Getty Images
UBS strategists say six out of eight signs of a stock market bubble are already flashing.
Generative AI hype has driven stock prices to record highs, raising bubble fears.
Current conditions mirror 1997, not 1999, suggesting a bubble could soon form.
There’s been a lot of talk about the stock market being in a bubble over the past year as hype for generative artificial intelligence drives stock prices to record highs.
In a recent note from UBS, strategist Andrew Garthwaite outlined the eight warning signs of a stock market bubble — and according to Garthwaite, six of them are already flashing.
That means the stock market isn’t in a bubble yet, but could be soon.
“The upside risk is that we end up in a bubble. If we are in such a situation, then we believe it is similar to 1997 not 1999,” Garthwaite said.
That’s important because stock market bubbles often lead to a painful 80% decline once it pops, but Garthwaite says we’re not there just yet.
“We only invest for the bubble thesis if we are in 1997 not 1999 (which we think we are),” Garthwaite said.
These are the eight stock market bubble warning signs, according to Garthwaite.
1. The end of a structural bull market – Flashed
UBS
“Bubbles tend to occur when historical equity returns have been very high relative to bond returns and thus investors extrapolate historical returns to be predictors of future returns – when in fact future returns, as shown by the ERP, are significantly below their norms,” Garthwaite said.
2. When profits are under pressure – Flashed
UBS
While S&P 500 profits have been booming over the past year, there is another measure of corporate profits that should be monitored by investors.
NIPA profits measure the profitability of all corporations, including private companies, and when those diverge with the profits of publicly traded companies, investors should take notice.
“We can see this if we look at the TMT period when the NIPA profits fell while…
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