Is the Stock Market in a Bubble? | Here's What You Need to Know

The S&P and NASDAQ are growing at breakneck speeds. AI companies are promising hundreds of billions of dollars that they don't have. U.S. GDP growth without data centers is 0.1%. And if you're around my age, you know that the job market isn't exactly doing so well right now. So all of that said, are we in a bubble right now? Are we in the bubble right now? And is the stock market about to crash? That is exactly what we're looking at in this video. I'm going to go over the argument for a bubble, the argument against a bubble, and then give you my take so that you can make informed investment and personal finance decisions. This is going to be an important one, so get caffeinated, get a notepad. And that said, let's go. Now, that said, I want to take a moment to talk about the sponsor of today's video, and that's Dolly Varden Silver. Publicly traded on the TSX as DV and on the NYSE as DBS. Now, you may have seen all the news about gold recently, and I'll be straight with you. 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That's why Dolly Varden is a favorite silver stock right now. And again, the tickers are DV on the TSX and DVS on the NYSE. So this is the link to their investor relations page, and you can visit the link down below to learn more about the company and invest through Orbitron, which is securely integrated with all major brokerages. So like I said, they have a really cool story, and I'm glad I got to share that with you. And that said, let's get back to a little bit more about the market. OK, so first I want to cover the side of us being in a bubble right now that is going to lead to a crash in the very short term. And I think there are two things we can tease out here. One side of it is just AI focus, that we're in an AI bubble, which is still big, but that's different than the entire economy. And the entire economy being very overvalued with a structural kind of mega crash coming, just like you saw in 2008, or maybe the most famous example would be the Great Depression. So the first point in the case for a bubble is the valuations of stocks in the stock market. So there's a metric called price to earnings, where it compares the actual amount of money or earnings that a company is delivering compared to the price of that stock. Now, the current S&P 500, which you can think of as a bucket index for the entire stock market, is trading at a forward P to E or price to earnings of just about 22.5. And that basically means the current price is about the next 22.5 years of company earnings summed up. Now, 22.5 is roughly where this ratio was during the peak of the dotcom boom. And so that in of itself is a sign for a lot of people that the market is really overvalued and the whole market is overvalued right about now. There's also something called the Shiller P to E ratio, which is a little more long-term focus, but still focuses on valuation fundamentally. And this crossed 40 recently, and that is roughly what it was during the 1999 to 2000 market crash. So what this says basically is that we are paying more now for future earnings or profits of all the companies around the country. But it's not just that we're paying more, it's who we're paying it to. And that brings us to point number two in the case for a bubble, which is market concentration. And what we're seeing in terms of concentration right now is that the entire American stock market is really being pulled along by just a handful of the top companies. Like when you buy the S&P 500, which is the big index that supposedly represents the entire American economy, half of the money that you put in there is actually just going into a handful of stocks that you've definitely heard of, like Nvidia, Amazon, Google, Tesla. And that's just because these businesses are so massive, right? Nvidia is a $4.5 trillion stock. And they're not just massive, they are some of the best run, most profitable, highest growth companies in the world. And so they keep compounding, they keep growing even more. And just think about it, if we have 500 stocks in the S&P and the top 10 grow at 10% a year, and the bottom 250 grow at 3% a year, then of course, over time, the concentration, right, the density of that capital is really going to be focused on just a handful of stocks. In fact, just five of those companies that I mentioned and that you probably know by name make up 20% of the global MSCI world index. So yes, the stock market has been ripping, right? We've had a great few years in the market, but have we actually? Or is it just a few of the top stocks have been doing really, really well, everything else isn't doing so well. And if that's the case, then what happens if one or two of those companies start to not do so well? That's the case for this kind of balloon facade that could be the market if these few companies that are pushing us along start to deflate. And that brings us to that second kind of AI focused hype specifically that I touched on, which is those top companies are those top companies in large part because of AI, right? NVIDIA is number one. The only reason that they are anywhere near that kind of valuation is because of AI. You could argue a lot of Google's growth recently has been AI. Same with companies like AMD and Oracle. All these kinds of companies are using AI even in ways you may not see. For example, there's been a lot of layoffs over the past year or so. And some of that at least is due to more productivity because of these AI tools and having to pay fewer salaries translates into more growth, which translates into higher valuations and so on. So purely when thinking about AI, the question comes down to, are companies really seeing a return on the capex or the expenditures that they put into AI infrastructure and AI software and hiring people to use AI internally? And we've seen a lot of news about a lot of things like AI coding not actually being so useful within companies and also things like valuations. When you think about open AI being worth over half a trillion dollars with revenue that looks like this. And more so than that, there's this circular deal thing going on where companies are promising other companies that they'll buy GPUs, but only when those companies give them money to go buy those GPUs to inflate stock prices, which then funds the whole thing. And it's a whole legal thing. But some people are concerned that in the future, if some of these technologies don't work out so well, then the AI sector goes boom. And that's on the corporate side. And what about the startup side, right? There is so much money, right? Hundreds of billions, trillions of dollars pouring into startups, where if those start to not do well, if demand for AI tech wanes, then you see this just capital implosion that affects the venture markets and private equity and all the hedge funds and banks. And then if that goes and affects those top 10 stocks that are holding the whole economy up and those break down, then you can see this perspective of why a lot of people think there could be a crash around the corner, or at least there's a very real risk for some kind of crash. Okay, now the final point that I want to touch on from the pro bubble perspective is that the job market is really cooling off right now. As someone who is of the age where people are just coming out of school and applying to jobs, it is a bloodbath out there. And a lot of that could be due to AI and to automation, where you just, you don't need as many entry-level people anymore. Also, you have things like GDP growth without just data centers. I think I read this thing that American GDP growth without data centers was 0.1%. Basically meaning without just one facet of AI, we're borderline in a recession. And we may not feel those things now, but again, if you pop the AI balloon, then what happens to the rest of the economy that actually wasn't doing so well and the job market was shot and we were already growing at 0.1%, right? That kind of combination of these things is what people are very fearful of. Now, that all sounds like a lot of doom and gloom here, but now I want to give you the opposite perspective. So why we aren't in a bubble and why this time is very, very different. So if we think back as an analogy to the dot-com era, there were lots of companies that had these massive valuations that were growing really fast, but they weren't actually making that much profit and their business models were not actually proven. But today you have that bundle of stocks that I mentioned, so what are popularly called the Mag7. But today these Mag7 companies are some of the best run and fastest growing and most profitable enterprises and organizations in all of human history. These companies have balance sheets that are like medieval fortresses, right? Massive cash flows, hundreds of billions of dollars of free cash flow, and they just keep doing it. They just keep growing users, gaining market share, compounding their talent, their wealth. And Google, for example, has had three Nobel Prize winners inside their company, I think in the last two years. Facebook just out of nowhere, even with all its AR, VR stuff not really working out so well in the past few years, is just gaining hundreds of millions of additional users. And just take a look at this chart of Nvidia's projected revenue for the next 10 years. Now, if these companies were that good, you would think that they themselves as the leaders of this overvalued S&P would be overvalued themselves, but they're actually not. Nvidia trades at just 23 times forward earnings. Google and Amazon are also trading at pretty cheap valuations. And if you compare this to something like the dot-com bubble, you had things like companies like Cisco trading at over 80 times forward earnings. And yes, today you have companies like Palantir that have insane P to E ratios assigned to them. But for the most part, those behemoths that are driving a lot of national growth, they're pretty fairly valued. They're growing really fast. They're all around really solid companies that you should be fine reasonably depending on. So that's point number one about the concentration and valuation side of things. Now, point number two is just that the AI boom is real. These returns are being materialized. And the kind of CapEx and investments that we're seeing are just gonna drive such massive growth down the line that in fact, everything right now is undervalued, not overvalued. Now, part of this story lies in the demand for things like AI data centers and chips and cloud and web services. Just look at some of these charts and companies across all industries are driving this kind of demand. And going back to things like the job cuts, a lot of that does today come from AI. So you're seeing all kinds of companies across the US, across the world become more productive and increase earnings because of AI and AI adoption of technologies are only going to exponentially get better over time. In fact, and I think this is a really important point. If we look at recent quarters and the quarterly reports that companies come out with, a vast majority of companies are actually beating expectations that analysts assigned to them. Basically, that means that companies are actually growing their bottom line, so their profitability and their revenues faster than experts think. And a vast majority of companies in all sectors are continuing to do that. And so if companies are growing faster than ever due to AI, due to technology, then, well, the markets should do better. The markets should go up a lot and people should price in more growth, which then causes things like the S&P's P to E ratio to be a little higher than normal. So the final point here on the side of, hey, there's no crash coming, we're not facing a bubble, is that we're missing a few of the key ingredients that you need and that you've seen in things like the 2000 and the 08 crashes. Now, one of those is leverage or debt. So like in 2008, the bubble there, the structural, right, the whole macroeconomic crash was fueled by bad debt, by mortgages and cash that was just being handed out left and right to people who should not have been approved for those kinds of loans. Now, today, corporate and private balance sheets are much healthier across the board. You got a lot of regulatory improvements as well since then. And so we're not as leveraged as previously. There's not as much kind of gasoline on the fire, so to speak, so that even if something got lit up and you had a little flame, it's not necessarily going to blow up, right, the whole economy with it. And then number two, in looking at the IPO markets or new companies that come on to the stock market, right, in 2000, any company with .com attached to its name would just go public and get this sky-high valuation. And today we have a super disciplined, super tight IPO market. A lot of that is due to the regulatory environment over the past five years or so. And a lot of it is also due to private capital becoming an increasingly large source of money for private companies. And that's why companies like SpaceX and OpenAI and Databricks and Stripe haven't yet gone public. They just don't need to. And so that also helps on that devaluation side of things. Okay, so that all brings us to this question of, are we in a bubble and is a crash incoming? Based on all that kind of information, I'll just give you my take. But of course, the reason I gave you all of that, I didn't just spiel about what I think, is that so you can make an informed decision for yourself. Now, after I share what I think, I'm gonna go into three crash catalysts or things that if they happen, are probably going to trigger a whole lot of red. So that being said, I do not think that we are in a bubble. I do not think a structural crash is around the corner. And that's the key. A structural crash isn't a macro economic crash that affects every sector of the economy en masse. Rather, I think we do have really high valuations that are excessive, but only in very specific parts of the economy. For example, within AI, I do think there are a lot of AI companies that are bubble-like priced. And so what I do is just, I don't invest in those companies. And I think you will have like a car wash equivalent for the AI market, just like you had for the internet, where the hype is real, right? The internet changed everything for the whole world, but it still had a crash. But even despite it realizing so much value, you still had it being overvalued at some point. So if you took the AI market right now and you drove it metaphorically through a car wash, a lot of companies would get cleaned out. A lot of capital, a lot of bad ideas and ideas where just the revenues and the profits just aren't there. But you would come out of that car wash with a lot of companies that absolutely deserve the valuations that they have and are actually undervalued because they're going to realize such massive revenues and earnings as AI continues to improve across the board in the software domain and critically in the hardware domain. But overall, the economic situation right now is different than previously. Again, the big things there in my eyes are number one, leverage, and number two, earnings. So the fact that companies are in fact, just continuing to grow faster than we think they should be. That said, to wrap up this video, here are the three crash catalysts. So number one, if we have an earning season in one or two or three quarters and companies across the board just start missing targets, and we're talking about the mag seven earnings just are sucky across the board, that absolutely would be a correction. So a 10 plus percent downward move, if not a full on crash. These kind of mega cap stocks are priced to perfection. And if they start missing numbers, then everyone would dump those. If everyone dumps those, everyone dumps everything and it would just be right across the board for a while. Okay, now number two is the Fed, right? The Fed are cutting interest rates right now. We've been in a high interest rate environment for a few years and we're going into this interest rate cutting cycle. And interest rates going down essentially makes economic activity easier because debt is easier and things are cheaper to go and do. And so that is a big kind of growth driver over the next few years, at least here. Now, if the Fed came out and said, hey, inflation is actually going back up, super sticky, and they don't keep cutting interest rates or they start raising interest rates, then that also is going to be a lot of red pretty fast. And a lot of central banks around the world follow what the U.S. does. So if they see things getting sticky over here, then you're talking the whole world kind of fundamentally reprices at least a little bit. Okay, and the number three is just a real fundamental recession in the U.S. Again, a lot of people individually aren't doing well. The job market is iffy. And that could eventually just weigh on people and companies too much, which could cause a recession and a recession could drag down earnings and all kinds of stuff. These things could mix together into the pretext for a crash. But that said, again, I don't think there will be a structural crash anytime soon. And my general investing strategy is just look for great companies that are undervalued and put money in them for the long term. That said, let me know what you think about the state of the market right now and subscribe for more videos like this. That said, I'll see you on the next one. Cheers.