Everyone Knows It's a Bubble

“There is protection only in a clear perception of the characteristics common to these flights into what must conservatively be described as mass insanity. Only then is the investor warned and saved.”
John Kenneth Galbraith

US stocks are on a tear. The market, as measured by the S&P 500 Index, is up just over 9% YTD, recovering all the losses experienced in early April. This year’s performance comes on top of back-to-back 20% plus gains in 2023 (+24.23%) and 2024 (+23.31%). The last two years mark the first time since the late 1990s that the S&P 500 has recorded consecutive 20% plus gains. It’s no wonder that we see weekly headlines touting record highs in the S&P 500 and Nasdaq. Can the market continue to deliver outsized returns going forward? To borrow a quote from the famed investor, Howard Marks, we may not know where we’re going, but we better know where we are.

So where are we, you ask. The chart below paints the picture from a 30,000-foot view.

We’ve borrowed this chart from another famed investor, maybe the most famed of all, Warren Buffett. It depicts the relationship between the total market capitalization (value) of the S&P 500 to the size of the US economy or GDP. Buffett’s original chart used the Wilshire 5000, which is a broader index, but is similar in scope given the market capitalization weighting of the largest components. The bar at the bottom of the chart shows the ratio of total stock value to GDP. As of the end of Q1 2025, the value was 1.731, which means that the total stock value of the S&P 500 was 73% larger than the economy. That is greater than the peak registered in 2021 of 1.63, and the late 90s tech bubble peak of 1.25.

Why is this chart important? Well, in the long run, stock prices or the values of companies should bear some relationship to the size and growth in the economy. Ultimately, stock values should only rise if we see an increase in economic productivity and growth. A stagnant economy combined with a raging stock market is typically a sign that one element or the other is out of whack. Stated another way, the current Buffett Indicator, as shown above, leads us to expect that either economic growth is about to take off, or stock values will fall precipitously to bring the ratio between the two back into a normal range. Unfortunately for holders of the large technology stocks and the broader stock index, we believe that the latter is more likely.

We hear counter arguments on TV every day from the talking heads who believe that artificial intelligence is about to unleash a massive wave of productivity growth, or they claim that the Buffett Indicator is out of date, and they offer another valuation metric that confirms that the bull market run is still in early innings. Our view today, as it has been for the last couple of years, is that we are in the midst of an AI fueled stock market bubble, similar to the internet fueled bubble of the late 1990s. Warning of a stock market bubble when the market is at all-time highs and everyone is enjoying watching their 401k balances rise on their quarterly statements is not a great way to win a popularity contest. In the words of John Kenneth Galbraith, there are “few matters on which such a warning is less welcomed.” Therefore, don’t just take our word for it. Here are some recent quotes from experts in the fields of technology / AI and economics that offer similar sentiments:

1. Alibaba’s chairman is warning about an AI data center bubble. Here’s why
• March 25, 2025, article from Quartz
•Article quotes from Joe Tsai, Alibaba Chairman
   ◦ “I start to see the beginning of some kind of bubble.”
     ◦ “I think, in a way, people are investing ahead of demand that they’re seeing today, but they are projecting much bigger demand.”
2. Apollo’s chief economist warns the AI bubble is even worse than the 1999 dot-come bubble
•July 17, 2025, article from Fortune
•Quotes for Torsten Slok, chief economist of Apollo Management
   ◦ “The difference between the IT bubble in the 1990s and the AI bubble today is that the top 10 companies in the S&P 500 today are more overvalued than they were in the 1990s.”

3. OpenAI’s Sam Altman sees AI bubble forming as industry spending surges
•August 18, 2025, article on CNBC
•Quotes from Sam Altman, CEO of OpenAI
◦ “Are we in a phase where investors as a whole are overexcited about AI? My opinion is yes. Is AI the most important thing to happen in a very long time? My opinion is also yes. When bubbles happen, smart people get overexcited about a kernel of truth.”

So, there you have it from the chairman of Alibaba, the chief economist from one of the largest private equity companies in the world and the godfather of AI himself, Sam Altman. These three prominent figures, and many others, are screaming from the mountain top that we’ve gotten a bit ahead of ourselves in terms of values in the financial markets. Yet, the market continues to go up and new highs continue to be reached. You’ll hear many experts on TV talk about how they are underweight some of the AI darlings such as NVIDIA because it has run up so much. The problem with that statement is that NVIDIA’s stock is valued at $4.2 trillion and represents over 8% of the index. Therefore, an investor can be underweight NVIDIA relative to the index but still have a 7% allocation and have it as their largest individual holding. In other words, many investors claim to be underweight NVIDIA and some of the other technology winners of recent years, but almost nobody is underexposed.

We see this fact clearly in reviewing the top holdings of the largest funds and ETFs in the US. Topping the list with $367 billion in total assets is the Invesco QQQ Trust (QQQ). That fund’s top 3 holdings (as of 8/18/25) are NVIDA at 10.05%, Microsoft at 8.7% and Apple at 7.8%. Next on the list we find the Vanguard Growth Fund Index with combined assets of $325 billion. Its top holdings (as of 7/31/25) are NVIDIA at 12.65%, Microsoft 12.19% and Apple at 9.49%. QQQ and Vanguard Growth are both index funds, but the actively managed funds are generally just as exposed to large tech stocks. Take Fidelity Contrafund with $173 billion in assets under management. Its top holdings (as of 6/30/25) are Meta Platforms at 18.13% and NVIDIA at 8.87%. We could go on down the list and find a similar make up in most of the large funds, but the point is that it is extremely rare to come across a large cap growth or blend US stock fund these days that does not have significant exposure to the technology behemoths.

Given this fact, we conclude that many investors must be experiencing an extreme case of cognitive dissonance. It is no secret that the stock market is at all-time highs and that the AI bubble may be overdone in the near term, but yet many investors are fully invested in the technology / AI stocks that have gone up the most and therefore, we would argue, have the furthest to fall if the current narrative falls apart.

What factors cause such a large disconnect? We believe there are several different forces depending on the investor type and his or her circumstances. Despite some of the leading experts stating publicly that the current level of excitement may be overdone, we do think that some investors truly believe that AI technology is changing the world and that no price is too high to pay for these companies. Those investors may ultimately be proven right on the technological side, but they’re playing a dangerous game from an investment perspective. Another important factor is the fear of missing out. “If my co-worker or brother-in-law is getting rich investing in NVIDIA stock, then gosh darn it, I deserve to as well.” FOMO is very powerful in the investment world and not to be overlooked.

From a professional investor perspective, which would include all of the large mutual fund managers who are packing their funds full of these tech names, we believe some of the most relevant factors are group think (everyone around me is doing it), job security (I’ll get fired if I don’t own these stocks) and low pain tolerance (I can’t stand to underperform for multiple quarters or years even if I have serious doubts about the sustainability of the values).

Warren Buffett offered a much more elegant description of this phenomenon in his shareholder letter in early 2000, just prior to the technology bubble imploding. In it he stated:

“The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities, that is continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future, will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”

Speaking of dancing, we are reminded of a quote from Charles Prince, former CEO of Citibank, who stated in July 2007, just before the Great Financial Crisis, that “as long as the music is playing you’ve got to get up and dance.” Once again, here’s another example of a leading expert acknowledging that there was significant risk brewing beneath the surface, but as long as values go up and people are making money you must stay in the game. This pattern of human behavior, where investors deep down know there is a serious problem yet choose to remain invested in the overvalued areas / companies anyway is one that has been repeated time and time again.

We believe today’s stock market, propelled by AI enthusiasm, is just another example and maybe the biggest example yet. If the AI music is playing, investors are going to keep on dancing. We, on the other hand, are going to sit this one out, because everyone knows it’s a bubble.

JPS Financial, LLC is registered as an investment adviser with the SEC and only conducts business in states where it is properly notice filed or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability.

Charts do not represent the performance of the firm or any of its advisory clients and are derived from sources deemed to be reliable. All information is believed to be current and should not be viewed as investment, tax or legal advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. You should consult with a professional advisor before implementing any strategies discussed. All investments and investment strategies have the potential for profit or loss.