Howard Marks: Is there a bubble in the US stock market now?

Currently, Wall Street is filled with debates about the "bubble in the U.S. stock market." Renowned investment master Howard Marks believes that while valuations may be somewhat bubbly, they do not seem crazy.

On Tuesday, Howard Marks, founder of Oak Tree Capital, published a column in the Financial Times discussing whether the U.S. stock market has fallen into a bubble. Marks believes:

Although the expected price-to-earnings ratio of the S&P 500 is high, it is not crazy, at 23.6 times. I have not heard people say "there are no prices that are too high," and while the market is high, it may have some bubbles, but in my view, it is not crazy.

Marks points out in the article that the exact sign of a bubble is irrational bubble thinking:

Compared to valuation parameters, a more effective way to judge a bubble is psychological diagnosis, a highly irrational boom—complete adoration of a group of companies or assets—leading people to be extremely afraid of missing the opportunity to participate in the bubble, firmly believing that these stocks "have no prices that are too high," especially when the latter is true, this is a clear sign that a bubble is brewing.

Marks also states that bubbles are often related to "new things," and excessive optimism about new things can lead to pricing errors:

Because bubble participants cannot imagine any negative impacts, they often provide hypothetical successful valuations. In reality, only a few newcomers may thrive or even survive. An outstanding newcomer may be replaced, and disruptors may also be disrupted.

Here is the full text of the column:

Today, many investors are highly vigilant about asset price bubbles, fearing that past booms and busts will repeat themselves.

Therefore, I am often asked whether there is a bubble surrounding the few stocks leading the S&P 500 index. The so-called "seven tech giants" have dominated the index's performance in recent years and contributed an extremely disproportionate increase.

You can identify a bubble through valuation parameters, but I have always believed that psychological diagnosis is more effective. What I look for is a highly irrational boom—complete adoration of a group of companies or assets—leading people to be extremely afraid of missing the opportunity to participate in the bubble, firmly believing that "there are no prices that are too high" for these stocks. Especially when I hear the latter, I believe this is a definitive sign that a bubble is brewing. In short, bubbles are marked by bubble thinking.

If bubble thinking is irrational, then what causes investors to deviate from rational thinking? The answer is simple: new things. This phenomenon relies on another timeless investment adage, "this time is different." Bubbles are always associated with new mistakes, from the Dutch frenzy over newly introduced tulips in the 1630s to the internet and telecom stocks at the end of the 1990s. Since there are no historical indicators to measure the appropriate valuation of new things, there is nothing to anchor them on solid foundations.

The bubbles I have experienced all involve innovation, many of which are either overvalued or not fully understood. The appeal of new products or business models is often obvious, but potential risks and pitfalls are often hidden. A new company may completely surpass its predecessors, but investors often fail to realize that even a promising newcomer may be replaced, and disruptors may be disrupted, whether by technologically superior competitors or newer technologies.In the 1990s, investors were convinced that "the internet would change the world." At the time, it certainly seemed that way, and this assumption led to a surge in demand for everything related to the internet. E-commerce stocks went public at seemingly high prices and then tripled on the first day. Behind every frenzy and bubble, there is usually a grain of truth, though some are exaggerated. The internet did change the world, but the vast majority of internet companies that soared during the late 1990s bubble ultimately became worthless.

Excessive optimism about new things leads to pricing errors. Because bubble participants cannot imagine any downside risks, they often provide valuations based on assumed success. In reality, only a few newcomers may thrive or even survive.

Stocks are sold at multiples of expected earnings for the coming year, reflecting expectations that they will continue to be profitable for many years to come. When you buy a stock, you are buying a share of the company's earnings for each future year. When buying stocks at above-average price-to-earnings ratios, investors are paying for the company's profits over the next several decades, even considering significant growth.

Today, the companies leading the S&P 500 are, in many ways, far better than the best companies of the past. They enjoy significant technological advantages and scale, but sustainability is not easy to achieve, especially in high-tech fields that are prone to disruption. During the bubble, investors treated leading companies as if they would surely maintain their dominance for decades. Some did, some did not, but change seems more common than sustainability.

Is the U.S. stock market too high? It is extremely rare for the S&P 500 to have returns of 20% or more for two consecutive years. This has happened in the past two years, with the S&P 500 rising 24.2% in 2023 and 23.3% in 2024, and now we are in 2025. What will the future hold?

Today's warning signs include the widespread optimism in the market since the end of 2022, enthusiasm for artificial intelligence as a new phenomenon, and the widely held assumption that the top seven companies will continue to succeed. On the other hand, while the expected price-to-earnings ratio of the S&P 500 is high, it is not outrageous at 23.6 times. I also haven't heard people say "there's no price too high," and while the market is high, there may be some bubbles, but it doesn't seem crazy to me