The Warning Signs of a Bubble
Stock-market bubbles have long been a part of financial history, from the Dutch Tulip Mania in the 1600s to the dot-com crash of 2000 and the housing market collapse in 2008. These bubbles are typically characterized by periods of irrational exuberance, where asset prices far exceed their intrinsic values due to speculation.
Today, many investors are questioning whether another bubble is forming. Andrew Garthwaite, a global equity strategist at UBS, believes six out of seven key indicators of a bubble are currently present. His analysis has raised concerns about the sustainability of recent market gains, particularly as the S&P 500 and tech-heavy Nasdaq continue to hit new highs.
This article examines each of these seven conditions, explores the reasons behind the strategist’s warnings, and provides actionable advice for investors navigating this uncertain environment.
What Are the Seven Signs of a Stock-Market Bubble?
A stock-market bubble is rarely identified by a single factor. Instead, it is the result of several interrelated dynamics. The seven conditions identified by Garthwaite are:
- The end of a structural bull market.
- Corporate profits coming under pressure.
- A narrowing market breadth.
- Excessive valuations.
- High levels of investor leverage.
- Overwhelming investor euphoria.
- Loose monetary policy (currently missing).
While these conditions do not guarantee a bubble, their combined presence creates a strong case for caution. Let’s break down each condition and explore how it applies to today’s market.
End of a Structural Bull Market
The first condition of a bubble is the end of a structural bull market—a prolonged period of rising stock prices fueled by economic growth, technological advancements, and robust corporate profits.
In the past decade, global equity markets have experienced a remarkable bull run. From 2013 to 2023, the S&P 500 delivered an annualized return of over 10%, supported by a booming tech sector, low interest rates, and stimulus measures. However, many experts believe the bull market is nearing its end.
The current economic environment presents significant challenges. Inflation, which peaked in 2022, has moderated but remains above central bank targets. Rising interest rates have made borrowing more expensive for corporations and consumers alike, slowing economic growth. Furthermore, geopolitical tensions, particularly the U.S.-China trade war and conflicts in Eastern Europe, have added uncertainty to the global economic outlook.
Historically, the end of a structural bull market often marks the beginning of a bubble. Investors who have grown accustomed to consistent gains may continue buying, even as economic fundamentals deteriorate—a behavior that can inflate asset prices beyond sustainable levels.
Corporate Profits Under Pressure
Corporate earnings are a cornerstone of stock valuations. When profits grow steadily, they justify higher stock prices. However, when profits stagnate or decline, the disconnect between valuations and fundamentals becomes evident.
In 2024, corporate profit growth showed signs of slowing. Companies across various sectors faced rising input costs due to inflation, higher wages, and supply chain disruptions. Even technology companies, which have been the primary drivers of market growth, reported slower revenue growth as competition intensified and regulatory pressures increased.
This trend raises concerns for investors. When corporate profits come under pressure, companies often cut back on investments, reduce headcounts, or focus on cost-cutting measures. These actions can create a negative feedback loop, further weakening economic growth and investor confidence.
Narrowing Market Breadth
Market breadth measures how many stocks participate in a market’s rally. A broad-based rally, where gains are distributed across multiple sectors, is a sign of a healthy market. In contrast, a rally driven by a few dominant stocks suggests underlying weakness.
In 2024 and early 2025, market gains have been concentrated in a handful of technology giants such as Apple, Microsoft, and NVIDIA. These companies have benefited from the AI boom, with investors pouring money into stocks perceived as leaders in artificial intelligence and machine learning.
However, the dominance of a few stocks raises concerns. When market breadth narrows, it indicates that the rally lacks support from the broader economy. If these dominant stocks falter, it could trigger a broader market correction.
Historically, narrowing market breadth has been a precursor to market downturns. During the dot-com bubble, for example, a handful of internet companies drove most of the market’s gains before the bubble burst in 2000.
Excessive Valuations
Stock valuations provide a snapshot of how expensive or cheap a market is relative to its earnings, cash flows, or other fundamentals. In 2025, many experts believe valuations have reached excessive levels, particularly in sectors like technology.
The price-to-earnings (P/E) ratio of the S&P 500, for instance, has consistently remained above its historical average. Meanwhile, the P/E ratios of some tech companies have soared to levels reminiscent of the dot-com era, fueled by speculation around their future growth potential.
Excessive valuations are often justified during bull markets by arguments about “new paradigms” or “unprecedented opportunities.” However, history shows that markets eventually revert to their means. When valuations become disconnected from reality, they are vulnerable to sharp corrections.
High Investor Leverage
Leverage refers to the use of borrowed money to invest. While leverage can amplify gains during bull markets, it also magnifies losses during downturns. High levels of investor leverage are a classic sign of speculative behavior and can contribute to the formation of a bubble.
In today’s market, leverage remains a concern. While regulatory measures have reduced some risks, such as those posed by overleveraged hedge funds, retail investors have increasingly turned to margin trading and speculative assets like cryptocurrencies. These activities suggest a growing appetite for risk, even as market conditions become more volatile.
During past bubbles, leverage has played a key role in exacerbating market crashes. When asset prices fall, leveraged investors are often forced to sell their holdings to cover losses, creating a cascading effect that accelerates the downturn.
Overwhelming Investor Euphoria
Investor sentiment is a powerful driver of market behavior. When euphoria takes hold, rational decision-making often gives way to speculative mania. In today’s market, several signs of euphoria are evident, particularly in sectors like technology and artificial intelligence.
The rise of meme stocks, cryptocurrencies, and speculative investments in AI startups reflects a broader trend of excessive risk-taking. Social media platforms like Reddit and Twitter have amplified this behavior, with retail investors banding together to drive up the prices of stocks based on hype rather than fundamentals.
Euphoria can be dangerous because it creates a feedback loop: rising prices attract more buyers, which further inflates valuations. However, when the bubble bursts, the resulting sell-off can be swift and severe, leaving investors with significant losses.
Loose Monetary Policy: The Missing Piece
The one condition that is not currently present is loose monetary policy. In past bubbles, central banks have often maintained low interest rates and easy access to credit, creating an environment that encourages speculation.
In 2025, however, monetary policy is tighter than it was during previous bubbles. Central banks, including the Federal Reserve, have raised interest rates to combat inflation, making borrowing more expensive. While short-term rates have declined slightly, long-term bond yields remain elevated, reflecting investor concerns about inflation and fiscal sustainability.
Despite this, monetary policy could shift rapidly if economic conditions deteriorate. A return to looser monetary policy could provide the final ingredient for a bubble to fully form.
Implications for Investors
The presence of six out of seven bubble conditions suggests that the stock market is at a critical juncture. For investors, this environment presents both risks and opportunities. Here are some strategies to consider:
- Diversify Your Portfolio: Avoid concentrating investments in overvalued sectors. Consider allocating assets across multiple industries, regions, and asset classes.
- Focus on Defensive Stocks: Companies in sectors like healthcare, utilities, and consumer staples tend to perform well during periods of market volatility.
- Monitor Key Indicators: Keep an eye on metrics such as market breadth, corporate earnings, and leverage levels. These indicators can provide early warning signs of a downturn.
- Avoid Speculation: Steer clear of highly speculative investments, such as meme stocks or overvalued cryptocurrencies, which are particularly vulnerable in a bubble.
- Prepare for Volatility: Maintain a cash reserve or allocate a portion of your portfolio to low-risk assets like bonds to weather potential market downturns.
A Bubble in the Making?
While not all seven conditions for a stock-market bubble are present, the combination of six out of seven indicators is cause for concern. The current market environment bears striking similarities to past bubbles, from the dominance of a few tech giants to the rise of speculative investments.
For investors, the key is to remain vigilant and avoid complacency. By understanding the dynamics of bubbles and taking a disciplined approach to investing, it is possible to navigate the risks and opportunities of this challenging market.
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