Focus on 'Five Signals'
Blind Investment in Stocks Like Opendoor
Sharp Rise in Virtual Assets Like Bitcoin
Rally Spreads Beyond Certain Tech Stocks
What are the signs of a 'market bubble' that investors are watching for? As the S&P 500 and Nasdaq indices in the New York Stock Exchange continue to hit record highs, concerns about signs of market overheating are rising. The Wall Street Journal (WSJ) on the 28th (local time) highlighted five major signals that could indicate a bubble in the market, including the sharp rise of speculative stocks.
The first signal is the sharp rise of highly speculative stocks. Opendoor Technologies, a U.S. real estate brokerage platform, saw its stock price surge by a staggering 377% in the past month, despite the sluggish U.S. housing market. The stock, which had fallen below $1 earlier this month, soared to $2.54. Kohl's, which had been struggling due to poor performance and frequent CEO changes, also showed an upward trend. In addition, some relatively unfamiliar stocks such as GoPro and Krispy Kreme recorded notable surges within a week.
Some analysts view this trend as a manifestation of 'excessive risk appetite' that appeared during the market's optimistic rebound following the tariff shock in April. Investment funds are pouring into unprofitable small and mid-cap stocks, meme stocks, and virtual assets. This is considered a representative sign of a 'market bubble.' The WSJ noted that the pattern of unprofitable companies experiencing 'blind surges' is reminiscent of the 2021 GameStop incident. In fact, among the 33 companies in the Russell 3000 Index whose stock prices have tripled since April, 27 were loss-making companies.
The sharp rise in virtual assets is also one of the overheating signals. With the Donald Trump administration's pro-virtual asset policies, some listed companies are buying large amounts of Bitcoin and using their own stocks as a kind of Bitcoin leverage product. Around 60 companies have adopted this strategy, and these companies are seeing their stock prices rise solely based on their Bitcoin holdings, regardless of their earnings or fundamentals. This is because investors are buying shares of listed companies that hold Bitcoin as an indirect way to invest in Bitcoin. If this investment trend spreads, it could lead to a chain reaction: a sharp drop in Bitcoin prices, followed by a sharp drop in the stock prices of these companies, and then a broader market shock.
The third signal is that the market rally is spreading beyond certain large-cap tech stocks. As market volatility has decreased, the upward trend has expanded across traditional sectors such as finance, industry, and communications. The KBW Nasdaq Bank Index has risen more than 7% in a month, and companies like GE Vernova and Trade Desk have also gained more than 20%. The proportion of S&P 500 stocks trading above their 50-day moving average has reached its highest level since last fall, signaling that the rally is not limited to a few large-cap stocks but is becoming a broad-based bull market.
The fourth signal is excessive valuation. The equity risk premium, which is the gap between the expected return on the S&P 500 and the yield on the 10-year U.S. Treasury bond, has approached zero. This means that the excess returns from stock investments have almost disappeared, which is a point of concern for investors.
The final sign is a disconnect from economic fundamentals. The U.S. economy is showing relatively solid growth despite inflation concerns due to tariffs. However, the consumer price index began to rise again in June, and the growth rate of private sector employment fell to its lowest level in the past eight months. Kelly Cox, chief strategist at Resolute Wealth Management, warned, "It is interesting to see such an optimistic market response at a time when the job market is clearly weakening," adding, "Once employment starts to slow, it does not recover easily."
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