Bursting the Myth: Understanding Market Bubbles

Executive summary:

  • It's important for investors to distinguish between market bubbles and regular market cycles. Market cycles are driven by fundamental economic factors and are an inherent aspect of market dynamics. In contrast, a market bubble is marked by unsustainable price increases unsupported by underlying fundamentals. When the bubble bursts, prices crash, causing significant and often permanent losses for investors.
  • If a stock's price is high and appears likely to fall, that doesn’t necessarily mean the stock is in a bubble. Rather, it might just be going through the typical stages of a market cycle.
  • Our current analysis of the U.S. equity market suggests that while there may be pockets of overvaluation, the overall market does not exhibit the characteristics of a bubble.


The term bubble in asset markets evokes images of rapid wealth accumulation, fueling a mania around an asset, ultimately followed by significant financial losses when the bubble bursts. This phenomenon has fascinated investors and economists for decades. Financial pundits frequently use the term across various topics—stock market bubble, AI bubble, real estate bubble, college tuition bubble—to the point where it seems everything is labelled a bubble. But what exactly is a market bubble, and how can investors recognize one?

In this article, we will delve into what constitutes a market bubble and examine current market conditions to determine if we are in one. I will argue that the term bubble is often overused, and a better analogy might be a balloon. Investors need to recognise that the economic system can manage exuberance unless it reaches an extreme, and that markets move in cycles rather than in constant bubbles. While today there may be pockets of exuberance in parts of the market, overall, I believe we are not in a stock market bubble.