The technology-focused Nasdaq 100 increased 31% in the last twelve months, the S&P 500 grew just over 25% and the Dow Jones appreciated 16%. And in the first two cases, indices now trading at all-time highs.
In this context, Andrew Garthwaitestrategist at UBS, warned that there are five signs that the stock market could be heading towards a bubblewhich could mean a potential drop of 80%, such as in the subprime crisis of 2008 or the dotcom collapse of the 2000s.
1. End of a structural bull market
First of all, the specialist explained that Bubbles tend to occur when historical stock returns were very high relative to bond returns.
This causes investors to extrapolate historical returns to predict future returns, when in reality future returns are “significantly below their standards”.
2. Earnings under pressure
On the other hand, although the gains of indices like the S&P 500 were growing over the past year, There is another measure that is not working as well.
It is about the net income of corporations in the National Income and Product Accounts (NIPA), which are not improving like those of listed companies. “The same thing happened in Japan in the late 1980s”Garthwaite said.
3. Loss of amplitude
Besides, The market is super concentrated in big technology stockswhile small stocks are not generating strong returns and do not occupy a significant position in investors’ portfolios.
4. Gap compared to the previous bubble
The strategist also mentioned that, normally, bubbles occur every 25 yearssince it is a sufficient period of time for investors to think that “this time is different” and begin to develop theories about the future. Now, the focus is on artificial intelligence.
“This narrative revolves around dominance or, more typically, technology. In the 19th century there was a bubble associated with railroads and in the 20th century there was a bubble in the period before 1929 that was associated with mass production of automobiles, the electrification of cities and radio”Garthwaite said.
5. Strong retail presence
Finally, Retail Investors Are Aggressively Buying Stockswhich reduces the risk premium of these assets and increases valuations. “There is some evidence of this, such as that the bull/bear ratio of individual investors is very high relative to the norm”established the UBS executive.
