Now there’s no shortage of questions currently vexing markets, but in our latest Taking Stock podcast, 'Bubble Watch', James Hughes and I take on arguably two of the biggest head-scratchers of the day, as well as one that’s perhaps not so big:
First, some general rules on bubbles.
Rule#1 - if everyone is saying the same thing, it’s probably not true.
Rule#2 - you don’t know if a bubble exists until after the event.
Rule#3 - bubbles can go on for a long time.
Turning to today’s markets, it’s easy to see why there’s talk of bubbles. Take tech. Since 2020, tech is up around 320%; the wider equity market 200%. Tech is a handsome outperformer. The outperformance has meant valuations are handsome too. That said, valuations are not in 1999 dotcom bubble territory. Back then, tech names were trading on much larger price-earnings multiples. In 1999, Cisco and Microsoft were on 60x earnings. Today, Nvidia and Microsoft are on 30-35x. Not cheap but not silly.
Bubbles aren’t confined to valuations. Earnings can join the party too. Here, there could be cause for concern. Thanks to seemingly impenetrable moats and market shares to die for, mega-tech stocks are currently generating stellar earnings growth and margins. Those heady rates though need to be maintained to justify current valuations. Trouble is, if more players enter the market, then those growth rates will likely come under pressure. For an idea on tech’s current earnings growth rates, the overall US market is expected to grow by 13.4% over the next 12 months. Strip out the AI-tech giants and this falls to 9.4%. That means AI-stocks are forecast to grow at 23.6%, a high number by any measure.
And then there’s the increase seen in vendor financing. Up until recently, tech spending had been funded through free cash flow generated – a clear differentiator with 1999 when much of the growth was funded through debt issuance and the leveraging up of balance sheets. This is changing, however. Both Oracle and Meta have recently issued debt, the first time major tech has done so. Nvidia, meanwhile, is increasingly funding its various customers in return for the promise of contracts. The whiff of 1999 is potentially getting stronger.
So, James and I agree that the short answer to ‘is there a tech bubble?’ is, on balance, no not yet. We also agree with Quilter Cheviot’s Global Head of Technology Research and Investment Strategist, Ben Barringer, who in his recent article 'Tech bubble 2.0?' wrote, “The current environment requires a higher degree of selectivity. We are focusing on growth at a reasonable price, not at any price, and believe that some caution should be heeded in certain areas.”
What about a gold bubble? A look at the chart shows the price has quadrupled to US$4,200 since 2011 with most of the gains made in the last 12-18 months; while a check on Google Trends shows current search interest in the term gold is at an all-time high. As for what’s pushing gold prices higher, this is harder to pin down as what drives gold varies over time. The yellow metal can be viewed as an inflation hedge, but it does not always behave that way. Gold can also be a hedge against things breaking or a hedge to equity markets, but as past performance shows this is not always the case. Exceptional price movement. Tick. Strong interest. Tick. Drivers. Not clear. Conclusion, gold possibly nearer a bubble than AI.
Past performance is not a reliable indicator of future performance
Hard to give a definitive answer, but helpfully Ross Yarrow of Baird Europe has put together a list of reasons why no one has a good word to say about the UK:
It’s not all doom and gloom though. Clouds and silver linings and all that, but because UK stocks have been unloved for some time now, they are cheap compared to the rest of the world. And within the UK market, small caps, which have fallen over the last three years, are looking especially cheap.
The UK doesn’t just have cheap valuations going for it. As James points out, the country benefits from good corporate governance - most companies have shareholders uppermost in their minds. The UK has the best legal framework in the world. Unemployment may be rising but is still relatively low. Growth is sluggish but not terrible. Inflation is high but not horrendous. In short, the UK, not in such a bad state after all.
Well, not all FT readers perhaps, but at least one, me!
The FT has helped to provide an answer. It looked at three million articles it has published since 1980 and has come up with a composite sentiment index based on the tone of the articles.
Past performance is not a reliable indicator of future results.
Between 1980 and 2006, the index bumbled along, sometimes positive, sometimes negative. The sentiment indicator however went decisively negative with the 2008 crash and has never recovered since, remaining in negative territory for the last 15 years. Reasons cited include journalists being coloured by the Global Financial Crisis experience; the rise in online readership that has led to an increased focus on the number of clicks an article gains. As everyone knows, bad news sells.
So if, like me, you think you are feeling more grumpy these days, it could be down to what you read in the morning. As for an antidote to grumpiness, a regular dose of the Taking Stock podcast series should do the trick.
Approver: Quilter Cheviot 30/10/2025
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