Are We In A Bubble?

Over the last few years the market has been on a heck of a tear. Global market returns, as defined by the MSCI All Country World Index, for 2023, 2024 and 2025 (so far) have been 15.3%, 19.6% and 13.6%.

Source: FE Analytics. Return for the MSCI All Country World Index is shown in Sterling terms with dividends reinvested.

It hasn’t all been one way traffic, but it has been a great run.

We all know the main reason for this surge of course, the development and adoption of Artificial Intelligence (AI). Indeed, the first iteration of Chat GPT was released to the public in November 2022 - kicking this whole thing off.

As the market has gone up, so too have valuations. The forward (next 12 month) Price to Earnings ratio on the US market (the S&P 500) now stands at 22.8x, a level previously only witnessed during the tech bubble of the late 1990s.

So I think it is perfectly reasonable to worry whether things are overheating and that we might be due a big sell-off - particularly if you are someone who is living off their assets and relying on your investments to fund your life. I get it, I do.

The challenge we have is two-fold. One, we can’t really know in real-time when we are experiencing a bubble. And two, even if we are in one - it is impossible to know when it will pop.

So, are we actually in a bubble?

If we look back further than just the past three years, tech stocks have been on a run for the ages.

When this ends, and it could end really quite badly, then it will seem like the most obvious thing of all time. I mean, just look at it.

Source: Ritholtz Wealth Management.

The main argument against us being in a bubble, is that the current market move higher has been driven primarily by fundamentals rather than speculation.

Companies are doing better generally, and no one is doing better than the tech companies. They are generating higher profits at better margins and so it is perfectly logical that their share prices are rising quickly.

Source: Factset via BNY Mellon.

If AI is as transformational for society as has been mooted, then companies are likely to be the primary beneficiaries.

A given task requires less in the way of manpower and cost - saving money and boosting profits. These benefits won’t just accrue to the big tech companies either, but will be felt across the corporate world. Great for stocks.

Given the current market is being driven by the biggest technological revolution since the invention of the Internet, it is natural to compare it to the Dot Com boom and bust at the turn of the millennium. Because although history doesn’t repeat, it does often rhyme.

Again, the main difference between today and that period is that the companies leading the market today are just better businesses than the ones back then.

Indeed, in the early 2000’s many of the highest flying companies were loss-making, underpinned by nothing more than hope and fluff.

Source: Factset and S&P via Franklin Templeton.

Nonetheless, there do look to be pockets of what Greenspan referred to as “irrational exuberance” in the current market - extreme levels of funding for nascent start-up ideas and a crypto boom come to mind. Projected AI spend numbers are pretty mind blowing too.

Source: LSEG Datastream via Quilter Cheviot Investment Management.

But to this casual observer it doesn’t feel like we are at the point of proper “euphoria” just yet. There is something real here.

If we are in a bubble, what do we do about it?

This is an even more difficult question to answer.

One step that it would seem sensible to take is that we might accept that our longer returns from this point might not quite be as juicy as they might be from the midst of one of the market’s (regular and completely normal) fits of pique.

The below chart is taken from JP Morgan’s excellent “Guide to the Markets” and shows how long term returns tend to get lower the higher your starting valuation.

Source: JP Morgan’s Guide to the Markets. Data as of the 31st October 2025.

So it would seem sensible to indulge in a little expectation management from here if you are just invested in the US (which you probably aren’t and absolutely shouldn’t be).

But the trouble with undertaking major surgery to your investment portfolio based on valuations is that unlike long term returns, valuations are a really crappy predictor of short term returns. So selling now based on high valuations might end up being a whopper of an error.

Source: JP Morgan’s Guide to the Markets. Data as of the 31st October 2025.

Making huge asset allocation decisions based on vibes is even worse. This stuff is totally subjective, anecdotes are not data and even the most informed insider can get it wrong in the short term.

What I didn’t mention earlier is that Greenspan’s famous “irrational exuberance” speech took place in December 1996. Three years and a 102% return for the S&P 500 before the market finally cracked in March 2000.

Bubbles naturally have negative connotations because of how they end. But huge returns are made during these periods - in order to get get the average long term return for the market not only do we need to sit through periods of drawdown, but we must be in the market for these sharp rips. If we get out too early it can knacker our long term plans.

Rather than move a big chunk of your investments into cash, or some similar means of de-risking your portfolio - a better idea would be to:

1. Stress test your portfolio - would you be able to negotiate a repeat of past market stress. If not, the time to adjust your asset allocation is now.

2. Ensure you are properly diversified.

3. Incorporate a systematic valuation discipline into your investment strategy.

   
   

And, like, go for a nice walk or something.

Past performance is not a guide to future returns. None of the above is intended to constitute advice to any one individual. If you have any questions regarding your specific situation, please consult with a regulated financial adviser.