Millions of Americans have watched their net worth surge since the pandemic, thanks to meteoric gains in the stock market. However, some economists are warning that things may be getting out of hand, with price tags on some stocks becoming untethered from reality.
According to Mark Zandi, chief economist at Moody’s Analytics, the market is “very richly valued, bordering on frothy.” He compares the current situation to the late 1990s dot-com bubble, where companies that didn’t even generate revenue were trading for high valuations. The Nasdaq surged 29% last year, with the S&P 500 gaining a staggering $10 trillion in value.
Zandi is concerned about a market drop, possibly exceeding 20%, which could do serious damage to the US economy. A sudden plunge in stock values would hurt fragile confidence and erode consumer spending, a crucial driver of the economy.
David Kelly, chief global strategist at JPMorgan Asset Management, agrees that high valuations are a concern. He warns that investors must be cautious about taking on too much risk, as asset bubbles can burst with devastating consequences.
UBS recently warned its clients that nearly all seven preconditions for a market bubble already exist. However, the bank also believes the market is not yet in a bubble and could easily rally another 15% to 20% before moving into bubble territory.
The bond market is on edge, with investors watching closely for any signs of trouble. Ed Yardeni warns that if the 10-year Treasury yield approaches 5%, the stock market will get “spooked.” However, Kristina Hooper, chief global market strategist at Invesco, says long-term investors should look past a market drop, as the overall environment is likely to be positive for stocks and risk assets.
Overall, while some economists are sounding the alarm on potential bubble fears, others see a buying opportunity in any market correction. As the US economy enters 2025, investors will need to navigate these uncertain times with caution and patience.
Source: https://edition.cnn.com/2025/01/03/investing/stock-market-2025/index.html