The New York Stock Exchange at Wall Street in New York City, U.S. (Credit: ANGELA WEISS/AFP via Getty Images files)
To say that U.S. stocks found a sweet spot the past few years would be an understatement.
Falling inflation, lower interest rates, healthy corporate earnings and a strong economy sent stock markets on a two-year run that has defied even the most optimistic forecasts.
The S&P 500 gained 24 per cent in 2023 and 23 per cent in 2024, owing in large part to the strength of the so-called “Magnificent Seven” stocks — Apple Inc., Microsoft Corp., Amazon.com, Inc., Alphabet Inc., Meta Platforms Inc., NVIDIA Corp. and Tesla Inc. — which accounted for 53 per cent of the S&P’s returns last year and now make up more than one-third of the S&P’s total market capitalization.
But the unexpected rise, now-lofty valuations and an enthusiasm for artificial intelligence that is drawing parallels to the dot-com era have some questioning whether markets are in a bubble.
That the last time the S&P 500 posted back-to-back 20 per cent gains was 1998 is only fuelling those concerns.
David Rosenberg, founder and president of Rosenberg Research, is one who believes analysts are underestimating the “tremendous confidence in the future” driving the 2023-24 rally.
Rosenberg says AI has hit an inflection point in the technology curve where investors typically lengthen their time horizons, as they did during the internet mania of the 1990s. Eventually, the dot-com bubble burst — but only after four years of incredible growth.
“Even knowing about the mid to late 1990s, we don’t know where we are right now in this cycle,” Rosenberg said. “Is it ’96 or ’97, or is it ’98 or ’99?”
Signs of a dot-com bubble ‘déjà vu’
Likewise, Bill Smead, founder and chief investment officer at Smead Capital Management, sees warning signs in the exuberance.
In a Dec. 10 note to clients, Smead said investors were facing a “déjà vu moment” with bullish sentiment prevailing, record-high equity ownership by U.S. households and speculative investments such as Bitcoin hitting new highs.
“Many of the most respected investors of the last forty years are sounding alarms that are falling on deaf ears,” he said.
Few dispute that AI will be transformative — it’s more a question of the market cycle, in which hype around new investments spirals into what former Federal Reserve Board chairman Alan Greenspan famously called “irrational exuberance” as investors drive stock prices far beyond what their fundamentals support, ending in a moderate correction or rapid freefall.
“There’s usually a grain of truth that underlies every mania and bubble. It just gets taken too far,” Howard Marks, co-chairman of Oaktree Capital Management, wrote in a note to investors on Jan. 2. “It’s clear that the internet absolutely did change the world — in fact, we can’t imagine a world without it. But the vast majority of internet and e-commerce companies that soared in the late ’90s bubble ended up worthless.”
But there are differences from the dot-com bubble, which was marked by “indiscriminate bidding” for companies with no viable business plans or path to profitability, such as pet supply website Pets.com or online grocery delivery startup WebVan, said Que Nguyen, a partner at New York-based Research Affiliates.
“It didn’t really matter what you said you were doing, as long as you had a dot-com next to it,” she said.
Many of the most respected investors of the last forty years are sounding alarms that are falling on deaf ears
Bill Smead
Even profitable companies that are still around today, such as Cisco Systems, Inc., got swept up in the hype as “the multiple kept ratcheting up faster than the earnings could catch up,” Nguyen said.
Cisco’s stock price peaked at $80 in March 2000 before declining 89 per cent by October 2002. Cisco’s fortunes have since rebounded, but its stock price has never fully returned to its dot-com-era high.
Nguyen says a common parallel is chipmaker Nvidia, a poster child for the AI revolution. As of Jan. 16, Nvidia’s stock price has risen 833 per cent since the beginning of January 2023. Nvidia contributed more than 22 per cent to the S&P 500’s overall return in 2024, more than any other stock. The difference with Nvidia, Nguyen says, is that investors are taking a wait-and-see approach to justify their expectations based on Nvidia’s revenue and earnings.
“They’re not necessarily ratcheting up the multiples ahead of the earnings the way they were doing in the tech bubble, (which) tells me that it’s optimism but it’s not unbridled euphoria, which is what you get in a bubble,” she said.
It also depends on your investing philosophy. Barry Schwartz, executive vice-president and chief investment officer at Baskin Wealth Management, says people who are calling it a bubble are likely dividend or value investors who don’t invest in tech stocks in the first place.
“My argument is you’re not paying attention to what matters today. You don’t understand those business models,” he said. “You can’t say Google is expensive or Meta is expensive at 25 times earnings and compare it to your Canadian bank at 12 times earnings. There’s no mean reversion to these companies; they’re just growing and taking market share.”
Betting on (or against) ‘American exceptionalism’
The unprecedented growth in big tech stocks means the U.S. now dominates global markets. U.S.-listed companies made up more than half of the world’s stock market value in 2024 and 70 per cent of the MSCI World Index, which tracks 1,500 mid and large-cap companies in 23 countries.
Some call it “American exceptionalism,” the idea that the U.S. has a unique fusion of factors — including a buoyant economy, strong dollar, educational opportunities, infrastructure, the world’s largest consumer market and many of the world’s most profitable companies — that make it inherently powerful.
“America is still a magnet for all sorts of people seeking freedom, people seeking economic opportunities, people seeking education opportunities, people seeking jobs, people seeking to start businesses, to innovate. I think that is something that is really unique about the United States,” said Nguyen. “There are other parts of the world that have that feature, but the United States is the largest country with that feature.”
To others, the idea of American exceptionalism is simply attaching a narrative to price action — a “camouflage” for government deficit spending propping up growth, said Rosenberg.
“If we are going to define exceptionalism as reckless fiscal policy, sure, let’s call it exceptionalism,” he said. “But that’s what makes America different, is that we are in the midst of an ongoing massive deficit-financed fiscal stimulus, whether it’s spending on one side of the income statement or tax subsidies on the other side of the income statement.”
The idea that the U.S. is inherently positioned for perpetual superiority also doesn’t sit well with everyone in other parts of the world.
In a Financial Times column, writer and economist Tej Parikh says America’s strengths mask some of its unflattering economic realities.
“The fanfare over U.S. capitalism is not unfounded. But it can obscure arguments that counter the idea of U.S. economic superiority,” he wrote, citing high household spending on healthcare with worse health outcomes, high levels of credit card debt, economic growth supported by government spending and the “privileged ability” to run deficits and the fact that lower income earners are squeezed to afford necessities while high earners own the majority of equity investments.
While the U.S. has scalability, liquidity and tech innovation on its side, Parikh argued in another column that there’s still opportunities for investors among European heavyweights such as LVMH Moet Hennessy Louis Vuitton SE, Nestlé S.A., Novo Nordisk A/S and ASML Holding NV.
“They are established, broad businesses with global exposure, low volatility and strong earnings — and some are now undervalued,” Parikh wrote, adding that Europe also has several “competitive” companies across different industries such as Glencore plc, Siemens Energy AG, Airbus SE, Adidas AG, Carl Zeiss Meditec AG and SAP SE.
“The stellar returns of the U.S. stock market do not mean that European companies are no good,” Parikh wrote. “Rather, investors are willing to pay a premium to get exposure to AI (and Trump 2.0) — one that is looking harder to justify.”
Looking into 2025
In 2025, Wall Street analysts are forecasting the S&P 500 to gain anywhere from 5 per cent to 20 per cent, with most analysts predicting between 10 per cent and 15 per cent — but they are keeping an eye on how an “unusually concentrated” market will affect returns over the long term, Goldman Sachs chief U.S. equity strategist David Kostin said in a November Goldman Sachs Research newsletter.
“Investors should be concerned about market concentration over the longer term, say 10 years, because the historical record suggests that a meaningful relationship exists between market concentration and forward returns, with high concentration associated with lower returns over longer horizons,” he said.
As the Magnificent Seven stocks continue their run in 2025, analysts are also keeping an eye on whether companies’ earnings can deliver on investors’ high expectations and sustain growth if strong performance is already priced in.
“It shouldn’t come as a surprise that the return on an investment is significantly a function of the price paid for it,” Marks wrote in his note. “For that reason, investors clearly shouldn’t be indifferent to today’s market valuation.”
Yields on 10-year Treasury bonds are also creeping up to 5 per cent, posing risk-free competition to the expensive equity market and making investors anxious that higher borrowing costs will dampen corporate profits.
But after two years of growth beyond wildest expectations, Rosenberg says beauty is in the eye of the beholder when it comes to the animal spirits driving the market rally.
“There’s people that believe that AI is going to produce 30 per cent of its growth over the next five years,” he said. “So, when I tell some people, ‘Well, 20 per cent is priced in,’ they say, ‘Oh my God, the market’s cheap then.’”
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