Currently, Wall Street is filled with debates about the "bubble in the US stock market". Renowned investment master Howard Marks believes that the valuation may have some bubble, but it does not seem crazy.

On Tuesday, Howard Marks, founder of Oak Tree Capital, published a column in the Financial Times of the United Kingdom, discussing whether the US stock market has fallen into a bubble.

Although the expected PE of the S&P 500 Index is high, it is not crazy, standing at 23.6 times. I have not heard anyone say, "There are no prices that are too high," and although the market is at high prices, it may have some bubble, but in my opinion, it is not crazy.

Marks pointed out in the article that the exact sign of a bubble is irrational bubble thinking:

Instead of valuation parameters, a more effective way to determine a bubble is psychological diagnosis, a highly irrational boom—total worship of a group of companies or assets, leading people to be extremely afraid of missing the opportunity to participate in the bubble, firmly believing that these Stocks have "no prices that are too high." Especially when the latter occurs, it is a precise sign that a bubble is brewing.

Marks also stated that bubbles are often related to "new things". Over-optimism towards new things can lead to pricing errors:

Since bubble participants cannot envision any negative impacts, they often provide valuations based on hypothesized success. In reality, only a few newcomers may thrive, or even survive. An outstanding newcomer may be replaced, and disruptors can also be disrupted.

The following is the full text of the column article:

Today, many investors are highly vigilant about asset price bubbles, worrying that past booms and busts will repeat themselves.

Therefore, I am often asked whether there is a bubble around the few stocks leading the S&P 500 Index. The so-called Technology 'Seven Giants' have dominated the index's performance in recent years and contributed disproportionately to its gains.

One can determine a bubble through valuation parameters, but I have always believed that psychological diagnosis is more effective. What I look for is a state of intense irrational exuberance – total adoration for a group of companies or assets that leads to extreme fear of missing out on the bubble, with a steadfast belief that there are 'no prices too high' for these stocks. Especially when I hear the latter, I consider it clear evidence that a bubble is brewing. In short, bubbles are marked by bubble thinking.

If bubble thinking is irrational, then what causes investors to deviate from rational thought? The answer is simple: new things. This phenomenon relies on another enduring investment adage: 'This time is different.' Bubbles are always associated with new mistakes, from the Dutch frenzy for newly introduced tulips in the 1630s to the Internet and Telecommunication Sector stocks at the end of the 1990s. With no historical indicators to measure the appropriate valuations of new things, there is nothing to anchor them on a solid foundation.

The bubbles I have experienced all involved innovation, many of which were either overvalued or not fully understood. The allure of new products or business models is often obvious, but potential risks and pitfalls are frequently hidden. A new company may completely surpass its predecessors, but investors often fail to realize that even a promising newcomer can be displaced; disruptors can be disrupted, whether by technologically superior competitors or newer technologies.

In the 1990s, investors were convinced that 'the Internet would change the world.' At the time, it certainly seemed so, and this assumption led to a surge in demand for everything associated with the Internet. E-Commerce stocks went public at seemingly exorbitant prices and then tripled on the first day. Behind every frenzy and bubble, there is usually a grain of truth, only that some have been exaggerated. The Internet did change the world, but the vast majority of Internet companies that soared during the late 1990s bubble ultimately became worthless.

Excessive optimism for new things leads to pricing errors. As bubble participants cannot imagine any downside risks, they often assign hypothetical successful valuations. In reality, only a few newcomers may thrive, or even survive.

Stocks are sold at a multiple of their earnings for the next year, reflecting the expectation that they will continue to be profitable for many years to come. When buying a stock, what is being purchased is a share of the company's earnings for each future year. When stocks are purchased at a price higher than the average PE ratio, investors are paying for the company's profits over the next several decades, even considering significant growth.

Today, companies leading the S&P 500 Index are much better in many ways than the best companies of the past. They enjoy significant technological advantages and scale, but sustainability is not easy to achieve, especially in high-tech fields that are prone to disruption. In a bubble, investors treat leading companies as if they will surely maintain their leading positions for decades. Some have succeeded, while others have not, but change seems to be more prevalent than sustainability.

Is the USA stock market too high? It is extremely rare for the S&P 500 Index to have a return of 20% or more for two consecutive years. This has happened in the past two years, with the S&P 500 Index rising by 24.2% in 2023 and 23.3% in 2024, and now we find ourselves in 2025. What will the future hold?

Today's warning signs include the widespread optimism in the market since the end of 2022, enthusiasm for AI as a new phenomenon, and the widespread assumption that the top seven companies will continue to succeed. On the other hand, while the expected PE ratio of the S&P 500 Index is high, it is not outrageous at 23.6 times. I also haven't heard people say, 'There are no prices that are too high,' and while the market may be pricey and possibly slightly bubbly, it doesn't seem crazy to me.