Albert Edwards, the famously bearish strategist at the French investment bank Societe Generale, has seen his share of euphoric episodes in financial markets.
He called the dot-com bubble in the US leading up to 2000, when the S&P 500 began its 50% decline. He also predicted a bubble in Japanese stocks in the late 1980s that finally popped in 1990.
Today, Edwards continues to sound the alarm about an ever-growing bubble in US stocks as investors remain giddy about artificial intelligence.
In a client note on Tuesday, Edwards laid out a few charts that fuel his concerns.
First is the fact that US stocks now make up 75% of global market cap. High concentration in one country could signal its market is over-bloated, like during the Nifty Fifty bubble in the US that ended in the 1970s, or the aforementioned Japanese bubble.
Then there's the tech sector's dominance within the US. IT stocks make up 35% of the market's value, exceeding levels seen during the dot-com bubble peak in 2000.
Investor exuberance is also at its highest levels in at least the past 40 years. The Conference Board's gauge on investor optimism, which historically tracks with S&P 500 price movements, is well ahead of where the market sits.
"This extreme high in US households' optimism on the equity outlook is a clear sign of froth, especially as that optimism has run well ahead of price performance," Edwards wrote. "Normally any divergence occurs after recessions where a price rebound from bear market lows has little impact on still shell-shocked investor sentiment, eg 2021 & 2010," he added, the emphasis his.
The story around why stocks will continue to outperform may prove plausible. As companies adopt AI technology in the years ahead, their profits could very well grow robustly. How things actually play out, and whether reality can live up to investors' high expectations, remains to be seen.
Either way, Edwards isn't buying it.
"My own extremely jaundiced view of US equity market exceptionalism is born from decades of hearing similar beguiling stories, be it the Nasdaq bubble in the late 1990s or before that the Asian economic 'miracle' of the mid-1990s," Edwards wrote. "Each and every bubble has a compelling narrative that only in retrospect is exposed as nonsense — most recently the 2008 Global Financial Crisis where the consensus view was that there was no bubble to burst."
He added, "Each and every bubble ends badly, and this one will be no different."
Edwards is regularly bearish, and he has consistently highlighted downside risks as the stock market has continued on its historic advance over the last couple of years.
His warnings fall well outside market consensus, with the median 2025 year-end S&P 500 price target among top Wall Street strategists at 6,600 (7.8% upside from current levels).
But his arguments on where stock valuations sit, especially in the tech sector, and how much they rhyme with periods such as the dot-com peak should give investors something to consider. After all, the market once shrugged off his Nikkei index and dot-com bubble warnings, too.
"I keep a copy of my 1989 research note handy in which I stressed that a sky-high Japanese bond/equity earnings yield ratio signaled that the Nikkei bubble was about to pop," Edwards wrote. "Back then investors were angry that I even dared suggest such a thing could happen."
