Investor Howard Marks, the co-founder and co-chairman of Oaktree Capital Management, is sounding alarms once again. Marks, who famously predicted the dot-com crash 25 years ago, highlights troubling market signs in his latest paper, “On Bubble Watch.”
What Happened
According to Marks, current indicators include over-optimism in the market, AI-driven enthusiasm, reliance on the “Magnificent Seven” tech stocks, and a worrying index investing bias.
Marks explains that today’s market conditions echo the same mania and irrational exuberance seen in past bubbles. “A stock market bubble manifests as a temporary mania fueled by irrational exuberance, blind adoration of companies, and an overwhelming fear of missing out,” he writes. The belief that certain stocks “are impervious to overvaluation” leads investors to assume, “there’s no price too high.”
The Warning Signs
- Over-Optimism: Persistent exuberance since late 2022 has propelled the S&P 500 to valuations that outpace global peers.
- AI Hype Spillover: Marks warns that enthusiasm for artificial intelligence has overflowed into other sectors, inflating expectations.
- Tech Giant Reliance: Dependence on the “Magnificent Seven” increases market vulnerability, as these companies dominate indexes and portfolios alike.
- Index Investing Bias: With valuation growth fueled by index fund purchases, stock prices risk detachment from intrinsic value.
While Marks refrains from declaring whether the market is in a full-fledged bubble, he emphasizes these patterns are concerning. Investors “shouldn’t be indifferent to these signs,” he cautions.
Lessons from the Dot-Com Bubble
Reflecting on the dot-com crash of 2000, Marks draws critical comparisons. Back then, his memo “bubble.com” highlighted the unsustainable valuations in tech, internet, and e-commerce stocks. By the time the bubble burst, most of the top 20 companies in the market had lost their prominence.
“At the beginning of 2024,” Marks points out, “only six of those companies were still in the top twenty. Importantly, of today’s ‘Magnificent Seven,’ only Microsoft Inc. (NASDAQ: MSFT) was in the top twenty 25 years ago.”
“In bubbles, investors treat the leading companies—and pay for their stocks—as though the firms are sure to remain leaders for decades,” he wrote.
Is the Market Truly in a Bubble?
Marks acknowledges counterarguments, including the observation that while the S&P 500’s price-to-earnings (P/E) ratio is high, it hasn’t reached extremes. Additionally, today’s “Magnificent Seven” companies are exceptional in their own right, which could justify their elevated valuations.
Still, Marks describes the current market as “expensive and perhaps slightly overheated,” though it lacks the full-fledged mania of a classic bubble. “For me, a bubble or crash is more a state of mind than a quantitative calculation,” he observes.
Marks’ paper serves as both a warning and a call for caution. Investors would be wise to heed his advice, as markets show signs of vulnerability despite their resilience. As Marks demonstrated 25 years ago, overconfidence in market stability can quickly lead to painful corrections.