Stocktake: Bubble trouble in the US?

Risk lies in ‘momentum strategies focused on market’s bubble leadership’

The charge that equities in the United States are in a bubble is not new. The Big Short investor Michael Burry is issuing bubble warnings, as is iconic investor Jeremy Grantham, while a plethora of bearish voices have sounded dire warnings over the last decade.

However, the recent bubble warning from veteran investor Richard Bernstein is different. Like Grantham, Bernstein warned of bubble trouble prior to the 2007 financial crisis. Like Grantham, he turned bullish as stocks bottomed. Unlike Grantham, he remained bullish over the decade-long rally that followed.

Bernstein is no perma-bear – far from it.

In a recent note, Bernstein referred to five characteristics of a financial bubble – increased liquidity, increased leverage, democratisation of the stock market (think of Redditors opening Robinhood accounts), increased equity issuance and increased trading. All five characteristics are evident today, he cautions.


That’s the bad news. The good news: unlike 2007, not everything is bubbly. Over the last three years, only three of 11 S&P 500 sectors have outperformed the market. Technology has soared, but the broader market has been left behind.

Similarly, non-US stocks aren’t bubbly.

The real risk, says Bernstein, lies in “momentum strategies focused on the market’s bubble leadership”. The odds are high that this bubble, like its predecessors, “will leave investors disappointed”.