Signs of a Stock Market Bubble Are Mounting

I moved to Miami Beach in late 2003, during the early innings of the housing boom that engulfed all of South Florida and most of the nation. 

Signs of new construction were everywhere and, over the next few years, three or four of my car tires would become victims of construction nails. From my balcony, I could count nearly 40 tall construction cranes as I looked across Biscayne Bay to the Miami skyline from downtown to a few miles up the road to midtown.

It was quite apparent by 2006 or 2007 that the area was going through a huge housing bubble. The cost to rent a place was less than half the monthly cost to buying the same abode with the traditional 20% down mortgage. When the housing market finally cracked, it triggered the Great Financial Crisis. At least I thought I would never see something so foolish again here in the Sunshine State in my lifetime.

I was wrong. The combination of greed and ultra-low interest rates until the Fed started to finally tighten monetary policy in 2022 has proven to be a powerful elixir. Today, there are as many if not more construction cranes dotting the Miami skyline than at the height of the previous housing boom. The only difference is that they are now building 60- to 100-story skyscrapers instead of the 30- to 50-story towers from the previous era. In addition, there is huge equity built up in residential real estate and major banks do not have nearly the exposure to real estate that they did earlier this century. Continued deterioration in the commercial real estate sector, however, is likely to remain a major headwind for the regional banking system for years to come. Scores of community banks will also go bust before all is said and done.

Regarding the stock market, it feels more and more like late 1999 or early 2000. The yield on the 10-year treasury ended the first half of 2024 at 4.4%. This is significantly higher than where this key benchmark began the year. The six to seven 25-basis-point cuts to the Fed funds rate in 2024 that futures were expected late in 2023 have completely failed to materialize.

The major indices, powered largely by enthusiasm for AI, ignored the rise in yield in the first two quarters of the year. At the halfway point of the year, the S&P 500 is up some 15% for 2024. The NASDAQ has booked an approximate 17% gain. It is important to note that a third of the gain in the overall market is from one stock, AI juggernaut Nvidia Corporation NVDA, which rose 150% in the first six months of 2024.

It has not been a broad-based rally at all. The small cap Russell 2000 is up just over 1% for the year, less than what an investor could have garnered in short-term and risk-free treasuries. The Invesco S&P 500 Equal Weight ETF RSP rose just a tad over 4% in the first two quarters of 2024.

To put this in perspective, NVIDIA now has a market cap nearly equal to the annual GDP of the U.K. and is generating margins no hardware company is history has been able to maintain over time. Barclays estimates that AI-related spending will rise $60 billion year over year in 2024 and by year's end, some $167 billion will be spent since the AI revolution ignited. To put it in perspective, the GDP for the U.S. for 2023 was a bit over $27 trillion, so by the end of this year, AI spending from the word "go" will amount to a bit over half of a percent of annual domestic GDP.

For those who have been investing for decades, the similarity to the internet boom which subsequently led to the internet bust grows greater by the week. By many measures, this market is trading at more extreme measures (price to sales, market cap to GDP ratio, etc.) than in early 2000 at the peak of that investment craze. Food for thought as we commence trading in the second half of the year.

At the time of publication, Jensen had no positions in any securities mentioned.