Is the US Stock Market Headed for a Bubble? Experts Warn of Tech Overreliance and Rate Hike Risks

Analysts note that the current concentration of tech stocks may be greater than the dot-com bubble. As expectations deepen that the Fed will maintain higher interest rates for longer, an increasing number of experts are expressing concern that the U.S. stock bubble is on the brink of bursting.

Bill Smead, founder and CEO of Smead Capital Management, warned in a recent missive titled "Passively Dangerous Bubble" that tech stocks are currently highly concentrated, and passive investment strategies have attempted to conceal this exuberant frenzy by shuffling tech stocks into other categories to mask their concentration.

When comparing the performance of the tech-heavy Nasdaq 100 index and Russell 2000, which is viewed as a small-cap index, the ratio of the two indexes is over 8.00, closing to the high of 8.16 during the dot-com bubble.

Today, household equity ownership is above 35%, similar to levels observed during the dot-com bubble. This metric has a negative correlation coefficient of -0.82 with annualized stock market returns over the following ten years.

Previously, investors have already begun to worry that the Fed may maintain a hawkish policy further based on a strong labor market and strong economic growth, leading to higher interest rates. Following Powell's speech, there is a growing expectation that interest rates will stay higher for longer. According to the CME FedWatch Tool, Fed funds traders currently assign a 59.0% probability of a rate hike for November, which is higher than the 45.2% probability assigned one week earlier.

1. Interest rates may remain high for the foreseeable future, which could keep borrowing costs elevated. As a result, stocks may come under pressure as investors more deeply discount the value of future corporate earnings.

2. At the same time, signs of a robust US economy, accompanied by a surge in Treasury debt sales and the possibility of the Fed maintaining high rates for an extended period, have propelled government bond yields to their highest levels in over a decade. This has led to lower attractiveness for riskier investments such as equities, which offer greater potential for returns elsewhere in the market.

Investors will keep a close watch on Thursday's release of the Personal Consumption Expenditures (PCE) Price Index, as well as Friday's monthly jobs report.

Against this backdrop, the market appears more susceptible to disappointing and negative news, such as the rise in Treasury yields, while forecasts of rising corporate profits have become more muted. Some analysts have pointed out that even the most optimistic earnings outlooks are already priced into stocks. For example, Nvidia's strong quarterly earnings and robust forecast released last Wednesday failed to lift the wider market.