The Quiet Stock Market Bubble That Few Investors Are Talking About

Right now, the markets are experiencing an odd phenomenon that doesn’t fit the pattern we’ve been taught to identify. You won’t find panic if you stroll around any trading floor or browse financial Twitter on a Tuesday afternoon. You’ll gain self-assurance. It’s almost too much.

The market veteran who has been following this game longer than most, Ed Yardeni, refers to it as “a bubble in fears of bubbles.” He is not referring to the “everything bubble” that pessimists foresaw during the years of the pandemic stimulus. That didn’t happen. Rather, what we’re witnessing is something more disjointed and difficult to define. Numerous mini-manias, resembling tiny fires that start, go out, and never quite spread, are strewn throughout the landscape.

It’s an exuberant scatterplot. While SPACs subtly reappear, AI stocks soar. Gold continues to break records. Although it has dropped from its recent peak, Bitcoin is still ridiculously high by historical standards, hovering around $110,000. Leverage-driven trading has returned. The amount of margin debt is increasing. And for some reason, the overall market simply keeps rising.

None of these excesses have caused the kind of spectacular crash we’ve grown accustomed to, which is what makes this moment unique, or at least different-feeling. The financial system was not destroyed by the 2021 meme stock frenzy. Instead of being a crisis, GameStop turned into a joke. Winter in cryptocurrency came and went. Like firecrackers rather than dynamite, each bubble burst separately.

Yardeni has lived long enough to notice the trend. During Janet Yellen’s time at the Fed, the “everything bubble” narrative first gained traction. During the 2020–2021 stimulus bonanza, it came roaring back to life. Everyone was positive that the structure would crumble under its own weight. It didn’t. Sector by sector, the air slowly leaked out without dragging the rest of the market down with it.

It’s difficult to ignore what’s left behind when standing amid the debris of those deflated bubbles. If you exclude the two-month pandemic lockdown, the US economy hasn’t experienced a true recession in sixteen years. The real GDP is at an all-time high. The stock market is at all-time highs. After absorbing the shocks, the system continued to move.

This is where it becomes uncomfortable, though. In a recent report, Goldman Sachs asked whether AI had reached bubble territory and gave both a yes and a no response. One of their strategists, Eric Sheridan, made an important observation: the AI build-out has turned “circular.” “This is another example of the current period rhyming with the dot-com bubble,” Sheridan remarked. “Big Tech companies are buying from each other and investing in each other, creating a closed loop that feels uncomfortably familiar.” rhyming.

Not to be repeated. The difference is important. The tech behemoths of today are not the profitable startups of 1999. These companies—Nvidia, Microsoft, Meta, Alphabet, and Amazon—produce massive amounts of cash flow, return capital to shareholders, and trade at valuations that, although high, fall short of the madness of the late 1990s.

Nevertheless, the unanimity has an unsettling quality. 277, or 83%, of the 334 analysts who cover the seven biggest stocks in the world have buy ratings. Out of those seven stocks, five have zero sell ratings. Selling is not advised by any analyst covering Microsoft, Nvidia, Alphabet, Amazon, or Meta. The room is not divided. A standing ovation is given.

Uncomfortable things about standing ovations can be found in history. Thousands of boom-bust episodes in individual US stocks between 1980 and 2023 were examined in a recent Harvard Business School study, which tracked every available indicator of expert sentiment as prices rose toward their peaks. The results are not encouraging.

Short interest does not increase during run-ups that result in crashes. It tumbles. It averages 5% of outstanding shares at its peak, which is less than the market average. There aren’t the people who ought to be placing bets against overpriced stocks. They have either joined the party or, worse, are just watching from the sidelines.

It resembles a reverse-wired fire alarm. When danger approaches, all of the system’s sensors—including media coverage, short-seller activity, and analyst forecasts—should flash red. However, every sensor reads “safe” during the poorly ending episodes. The likelihood that something is going to break increases with how confidently they give the all-clear.

There is a cognitive dissonance that is difficult to overcome when one walks through this environment and observes individual investors piling into the very stocks they claim are overvalued. Investors believe AI stocks and mega-cap tech are in bubble territory, but these same stocks dominate their portfolios, according to a recent sentiment survey by Investopedia. Despite being their top choice for overvaluation, Nvidia is still their top holding.

We are responsible for our fears. Although it’s an odd admission, it perfectly captures the moment. After AI stocks, gold has risen to the second spot on the list of assets that investors view as bubbly. However, individual stocks rank highest when asked what they would do with an additional $10,000. The fear of losing is still less potent than the fear of missing out.

This isn’t 1999, as Goldman’s strategists noted, and they are correct. However, the very fact that rhymes are not exact replicas makes them dangerous. It’s only when the chorus starts that you realize they are coming. A feedback loop that appears sustainable until it isn’t is created by the circularity of AI spending—companies investing in the infrastructure that other companies build, who then purchase services from the original investors.

Individual investors now prioritize geopolitical unrest over inflation and tariffs. It’s a significant change. Instead of feeling internal, the threats now feel external. Despite the increasing unpredictability of the outside world, the market itself feels stable. Even though they recognize the market’s resiliency, seasoned observers like Yardeni are cautious because of this confidence and sense of invincibility.

The background isn’t too bad. In actuality, it’s pretty good by most conventional standards. However, positive settings have previously preceded negative outcomes. The issue is not that the rally is based on false information or that experts are concealing something. Everyone believes their own predictions, which is the issue. The analysts who are giving buy ratings sincerely believe that these stocks will continue to rise. The investors who are stockpiling Nvidia and Tesla sincerely think they are making wise investments.

And perhaps they are. Perhaps because these bubbles are fragmented, they will continue to deflate harmlessly, one sector at a time, without causing a wider collapse this time. Perhaps the real productivity gains from the circular AI spending will be sufficient to support the valuations. Perhaps it will be years before the next recession occurs.

However, history indicates that you should start paying more attention when 83% of experts concur, when short interest is below average, and when all of the fire alarms are silent. The lack of warnings tells you less than you might think, not because a crash is inevitable. Every expert signal inside a bubble points in the incorrect direction. Additionally, practically all of the signals are currently pointing upward.