Worried that AI and Nvidia will push U.S. stocks to the extreme of a bubble? You could be wrong. Nothing creates a bubble more than the collective belief that the bubble has not yet arrived.
Every investor knows in their hearts that if you can't touch the bubble, don't touch it. But the question is, how should a bubble that is forming and has not yet burst? Some people may think that the limelight of the US stock market is now occupied by the "Seven Sisters" and AI, and the market value of these companies is frighteningly high. Taking Nvidia alone, a company that was not a big company a year ago, is now worth as much as all the energy companies in the S&P 500 combined. No matter how great the power of AI is, it won't be so big, right? As a result, the same market has skyrocketed one after another, and the same technology companies that are leading the next trend of the times have repeatedly emerged, stimulated by AI stocks, and the current popularity of U.S. stocks is very reminiscent of the "Internet bubble" that occurred 24 years ago. However, in our view, there is nothing wrong with believing in the alpha that AI brings, because the formation of bubbles is driven by innovation; And today's so-called "bubble", if you have to count, is at most the early stage of the "super bubble", it is AI that drives it, and what can detonate it is something else. In the final analysis, there are other factors at the role of this round of **. For example, the U.S. economy and U.S. stocks have benefited from the "big release" that began in the United States at the end of 2020, with abundant capital inflows**, coupled with the fact that the U.S. economy has not had a hard landing, and funds have gradually returned from emerging markets around the world. After that, coinciding with the successive emergence of Bitcoin and ChatGPT, it is not surprising that the funds in the market are like "sleepy and meeting a pillow". So, once these larger macro factors change, such as the market's long-awaited rate cuts before inflation is resolved, it is likely to turn into a super-bubble crash like in 1999 or even 1929. Prepare for the worst, and before a crisis arises, you need to think about your investments. Bubble controversyThe current beauty market has very opposing views on whether it is in the bubble stage. The reason why the market's judgment is so torn is that from the perspective of some indicators, compared with the situation of the last bubble, it is not yet time to worry; But by other indicators, it has now entered the stage of development of a super bubble. 
Source**: Bloomberg is also the Nasdaq 100 index, the blue line is the world-famous "dot-com bubble" that began in October 1998, and the black line is the wave of US stock rally since December 2022. It is clear that this rally is not so exaggerated compared to the bubble more than 20 years ago. The same conclusion can be drawn from the price-earnings ratios of star companies. According to the forward P/E ratio given by the market, Nvidia, which is currently the most up-and-coming AI stock, has a forward P/E ratio of less than 40 times; By comparison, Cisco, before the bubble burst in 1999, had a price-to-earnings ratio of 100 times. In addition, some well-known institutions and people who do not believe that the United States is currently in a bubble phase (such as Dalio of Bridgewater**) have a core argument for leverage. At present, the US market has not seen excessive use of leverage, which is also significantly different from the previous two super bubble periods. 
Source**: London Capital Economics has seen a significant decline in margin debt on the NYSE compared to the last superbubble, at least so far, and this indicator does not meet the prevailing definition of a bubble. This situation shows that the degree of speculation of most investors is not high, and the leverage situation of the entire market is still in a relatively safe position. Of course, the reason why these well-known institutions attach so much importance to the indicator of leverage ratio is because U.S. stocks have suffered big losses in this area. During the U.S. stock market crash in late 1929, the high leverage that investors received in the form of broker loans played a key negative role. Specifically, in the months leading up to the 1929 U.S. stock market crash, banks and brokers tightened margin requirements to unprecedented levels, resulting in a significant reduction in overcollateralization in many margin accounts. Subsequently, the economy and ** suffered a series of mild negative shocks, which began to force weak accounts to close their positions. In the end, because these accounts hold a sufficiently high percentage of the total market capitalization, the plunge turned into a rout. With the collapse of 1929 triggering dramatic global repercussions, and even one of the main reasons for the start of World War II, the lessons were so profound that generations of American financial practitioners have taken warning, at least on the surface. Therefore, the good performance of the leverage ratio indicator has made many investors judge that it has not yet entered the bubble stage, and have an optimistic attitude towards this wave. It is worth mentioning that the voices that believe that the super bubble is coming are not mainstream in this market, but they still need to be carefully discussed and discerned. First of all, relative to other technology stocks in the world, the US technology stocks have risen to a fairly high position, especially these technology stocks that have performed well recently, almost to the same position as in 2000. 
Source**: BCA ResearchAs shown in the chart above, the relative growth rate of 10-year earnings per share of US technology stocks relative to other technology stocks around the world, as well as the relative value of forward PE, have reached a very close position to that of the last dot-com bubble. From this point, it can be seen at least that the current level of US technology stocks is quite high. In addition, another indicator is speculative **underperforming, but blue chips are continuing**. It happened before the bubbles in 1929 and 2000, and the same thing is happening now. A plausible explanation for this is that experienced investors know that the market is too high, but for a variety of reasons, they have to continue to bounce on the edge of the cliff and pretend that nothing happened. In other words, if they die in the end, then they would rather die with these safer **. Of course, there is another dangerous indicator that needs to be paid attention to, that is, similar to Japan in the late 1980s, multiple bubbles, including ** and real estate, are superimposed to form a common super asset bubble. 
For many times in history, such a spike in assets has had a devastating effect, as it is now in the United States. Therefore, pessimists cite a number of factors to prove that the US stock market is now sitting on the crater of a super bubble, which, if burst, will at least halve the assets of tens of thousands of investors**, and eventually trigger a larger crisis. What we do know is that the bubble of any era is driven by innovation. In 1929, these innovations were railways, radios, ** and automobiles, and in 1999, these innovations were the Internet; Now, it's AI. These factors are only responsible for the bubble, but they are not the ones that caused the bubble to burst. What could really lead to the bursting of the super bubble is to cut interest rates before inflation is effectively brought under control. Historically, cheaper currencies have tended to be the biggest catalyst for superbubbles, and interest rate cuts mean increased liquidity in the market, and the indirect effect is that the value of the currency is likely to fall. And cutting interest rates when the rate hike phase has not yet been effective, every time it occurs in the history of the United States, it brings a huge market disaster (the 70s, and the dot-com bubble). The lessons of these disasters are too profound to be written on the wall of the Fed chairman's office, and it is impossible for any incumbent ** to ignore them. It is also for this reason that we believe that the Fed and Powell are unlikely to start cutting rates easily, and the many signals of rate cuts released from the end of December last year to today are more likely to be a clever temptationWithout bearing the consequences of rate cuts, let the market have a window of relaxation。At the last interest rate meeting of 2023 in December last year, due to the performance of US Treasuries at that time, the market had expected Fed Chairman Jerome Powell to release a signal after the meeting to dampen any expectations of an early rate cut. But in reality, the Fed's full package, including its standard short communiqué, or economic survey, and his personal 45-minute press conference, has almost made it clear that it will cut rates this year. This year, the expectation of interest rate cuts by the Federal Reserve has suddenly increased, which has indirectly stimulated a number of American technology stocks one after another. But in fact, the United States has not completely come out of the shadow of inflation, as an investor, we must rationally judge the current interest rate cut expectations. 
Source**: Bloomberg.
The chart above shows that the core PCE price index in the United States rose by 3 year-on-year at the end of January this year, excluding the energy and housing services5%, up 06%。It is clear that the inflation indicator in January has rebounded in both month-on-month and year-on-year dimensions, and after a long period of interest rate hikes, the current inflation situation in the United States has eased, but there is still some way to go to achieve the target. Coupled with several macro factors, it is a sign that the Fed will not start the process of cutting interest rates anytime soon, including but not limited to: the US economy that is still accelerating, the overheated job market, financial conditions that are easing, rising rents and house prices, higher wage inflation, and the upcoming ...... in the United States**It can be said that the above factors that dominate the US economy and society are not conducive to the start of the interest rate cut process. As a result, the current situation is a bit delicate: the expectation of a rate cut continues to hold, which is a good thing, which means that the current rally can be maintained; However, if the Fed starts the process of cutting interest rates before the core inflation indicator improves, it will definitely not be good news for the current US market. Of course, as a rational investor, it is necessary to pay attention to the timing of the expected interest rate cut; And while waiting, some targets may be able to work miracles at this stage. First of all, it's AI, it's still technology stocks. In recent times, everyone has seen the performance of chip stocks, the infrastructure of the AI era. Since we were optimistic about AMD a year ago, this ** immediately turned on the flight mode after a short adjustment, and in the future, AI-related stocks represented by AMD will continue** and have strong momentum. Secondly, or something similar to that - Bitcoin. Although the performance of Bitcoin has outperformed the first end this year, the performance of two commodities that are strongly related to the expectation of interest rate cuts is very strong. Since the consensus expectation for the Fed's next move is to cut interest rates, there will be a basis for continued strength. Of course, in addition to this, there is also a high investment value in emerging markets. Since the beginning of this year, the performance of A-shares and Hong Kong stocks has also been seen by everyone, and the sustainability of AH is still worth looking forward to when interest rate cuts are expected to continue. The epilogue bubble is a game of drumming and passing flowers. The market's current consensus expectation of a bubble is still "no bubble", but such an expectation will also stimulate the formation and expansion of bubbles. At the time of writing this article, we looked at several studies describing the collapse of 1929, and after reading it, we only had one emotion: "History does not repeat, but it rhymes". 1929 was the culmination of a decade of boundless optimism, reflecting unprecedented prosperity and sustained economic progress not seen in at least a generation. The spread of new technologies, such as electricity and radio, prompted contemporary analysts to talk and write about a "new era" of abundance, characterized by major advances in the relations of production and productivity. How similar is this to today's AI wave? I just hope that this round of innovation-driven ** will not cause a tragedy because of the Fed's insistence on going its own way again. Disclaimer: This article is for learning and communication purposes only and does not constitute investment advice.