Is the bull market about to turn into a bubble?

TWO years ago, pretty much everyone agreed that one of the great bubbles was bursting. An era of rock-bottom interest rates was coming to a close, shaking the foundations of just about every asset class. Share prices were plunging, government bonds were being hammered, crypto markets were in free fall. Wall Street’s prophets of doom were crowing with delight. The consensus of the previous decade – that inflation was dead and cheap money here to stay – looked as ludicrous as the groupthink of any previous financial mania. Thus the pendulum was about to swing: from exuberance to scepticism; risk-taking to cash-hoarding; and greed to fear. It would take a long time to swing back.

Or not. The trough in American stocks came in October 2022. Less than 18 months later stock markets around the world are back at all-time highs. America’s in particular is on an eye-popping run, with the S&P 500 index of large firms having risen in 16 of the past 19 weeks. The value of Nvidia, a maker of hardware essential for artificial intelligence (AI), has risen by more than US$1 trillion in the space of a few months. Bitcoin hit another record on Mar 11. Disorientingly for those who blamed the previous mania on near-zero interest rates, this comes after a brutal campaign by central bankers to yank them back to more normal levels. Once again, every conversation about markets veers unerringly back to the same question. Is this a bubble?

For many, the parallel that springs to mind is not the most recent bull market but that of the late 1990s, when the dotcom bubble inflated. Then, as now, new technology promised to send productivity and profits to the moon, the innovation in question being the Internet rather than AI. Bulls in the 1990s were correct that advances in telecommunication would transform the world and spawn a new generation of corporate giants. Yet plenty still ended up losing their shirts – even by betting on firms that went on to be phenomenally successful. The canonical example is Cisco, which, like Nvidia, made hardware crucial for the new tech age. Although in the most recent fiscal year its net profit was US$12.8 billion, up from US$4.4 billion in 2000 (both in today’s money), those who bought shares at their peak in March 2000 and are still holding today have taken a real-terms loss of nearly 66 per cent.