A billionaire investor who accurately predicted the dot-com crash 25 years ago has issued a warning that he is “on bubble watch” as he spots cautionary signs in the market.
Howard Marks, one of the most respected value investors, believes that the return on an investment is significantly affected by the price paid for it, and investors should not be indifferent to today’s market valuation. He points to signs that may indicate a bubble, including market optimism since late 2022, enthusiasm for Artificial Intelligence, a reliance on tech giants, and index investing bias.
Marks cites the above-average valuation of the S&P 500, with its stocks in most industrial groups selling at higher multiples than those in the same industries in the rest of the world, as a cautionary sign. He also notes that the price of Bitcoin has risen 465% in the last two years, suggesting that there may be a lack of caution.
A bubble, according to Marks, is a temporary mania characterized by highly irrational exuberance, outright adoration of the subject companies or assets, and a belief that they cannot miss. He notes that it is characterized by a massive fear of being left behind if one fails to participate, and a resulting conviction that there is no price too high.
However, Marks also offers counterarguments to his points, stating that the P/E ratio on the S&P 500 is high but not insane. The top-performing seven companies, dubbed the “Magnificent Seven,” are great companies that may have warranted high P/E ratios. Marks also notes that the group of companies that were most heavily represented in the index during the 2000 bubble has shrunk, with only six of the 20 companies still in the top 20 by the beginning of 2024.
Marks is not convinced that we are in a bubble, but he is warning investors to be cautious, and he suggests that the market’s recent performance may not continue indefinitely. He concludes by stating that he is not an equity investor and is not an expert on technology, but he wants to lay out the facts as he sees them and suggest how investors might think about them, just as he did 25 years ago.