Macro
Analysts dismiss stock market bubble fears, citing strong earnings and controlled leverage despite tech-led rally.
By Athena Xu
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The S&P 500 has been on a bullish streak, climbing for 16 of the last 18 weeks and hitting a new all-time high. However, the rally has been driven by a select group of tech stocks, known as the “Magnificent 7,” with Nvidia leading the charge. Concerns have arisen about a potential market bubble due to the narrow nature of the gains, reminiscent of the late 1990s tech bubble. UBS strategists have drawn parallels to that era, highlighting similarities in sectoral patterns and valuations.
UBS Chief Strategist Bhanu Baweja dismissed the notion of an imminent bubble, citing differences in earnings, margins, free cash flow, IPO activity, and options market signals compared to the dotcom era. While the top 10 S&P 500 companies account for a significant portion of the index’s market cap, this concentration is justified by their strong earnings performance. The market's current enthusiasm is grounded in actual shareholder returns rather than speculative hype.
While the current market rally meets the criteria of a solid fundamental story and a narrative for future growth, the third ingredient for a bubble, liquidity and leverage, appears to be lacking. Despite ample liquidity, leverage levels are not at concerning levels, with margin debt and options open interest suggesting a lack of speculative excess driving the rally. The absence of excessive leverage is a key factor differentiating the current market environment from previous bubbles.
The absence of a bubble does not guarantee continued market gains, as UBS points out. Productivity growth is not as robust as in the 1990s, and economic indicators suggest a late-cycle economy. Real disposable income growth is weak, raising concerns about the sustainability of the current bull run. For the rally to persist, variables such as productivity growth, globalization trends, and income growth need to improve significantly.
Bhanu Baweja, UBS (Neutral on the market):
"Today’s sectoral patterns, narrowness, correlations, are similar to the second phase of the market; valuations are not far off either... there’s no bubble ready to go pop."
Skylar Montgomery Koning, TS Lombard (Bullish on Tech sector and market fundamentals):
"The top 10 companies in the S&P 500 account for around 34% of the index’s total market cap... However, it does mean that it is hard for the overall index to rally significantly without the participation of the Tech sector... Liquidity is still ample, but leverage is not yet at worrying levels. QT has not resulted in shrinking liquidity in the US so far... But leverage doesn’t look worrying; margin debt and options open interest suggest that it’s not speculation driving the rally."
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