Are We in a Bubble?
Stress-testing today’s rally across earnings, positioning, and policy
Intro – The Question
In the past week, talks of bubbles are everywhere. In equities – especially AI-driven tech – observers wonder if valuations have decoupled from reality. Credit is generous, spreads are tight, and policy has turned easier. But a bubble isn’t a binary label; it’s a process. We can stress-test the rally across valuation, earnings, positioning, liquidity conditions, and the macro tape to judge how hot things really are.
AI Bubble Debate — Consensus vs Contrarian
Exponential View sets out five gauges to test whether AI is in a bubble:
Economic strain: AI spend is still less than 1% of GDP — a green light.
Industry strain: capex/revenue runs at ~6:1, well above past bubbles like rail (2:1) and telecom (4:1) — an amber warning.
Revenue growth: generative AI revenues are compounding triple digits, over 130% YoY — firmly green.
Valuation heat: the Nasdaq trades around 32× forward earnings, elevated but far below the 72× seen in 2000 — green.
Funding quality: dominated by cash-rich megacaps like Microsoft and Amazon, a more stable base than the loss-making IPOs of 1999 — green to orange.
Goldman Sachs’ London trading team adds that positioning is far from euphoric. Their prime brokerage data show hedge fund long/short net exposure only at the 50th percentile of the past year. Much of the September rally was sidelined cash being forced back in.
Put together, the consensus view is clear: AI is hot, but not in a bubble.
What concerns us are the following.
First, the uniformity of research from both buy-side and sell-side — almost all conclude AI is not in a bubble. That very consensus is itself worrying from a contrarian lens.
Second, current valuations are rather high as Powell comments, and it currently assume near-perfect conditions: rate cuts delivered as expected and earnings continuing without disruption. Comparisons with the dot-com bubble are often used to dismiss today’s risks — but that was an extreme episode that ended in catastrophic drawdowns. Bubbles, however, come in all shapes and sizes.
Cold → Hot Roadmap Revised
Let’s take a step back to understand where we are in the bigger picture.
The Fed lowered rates by 25 bps to a 4.00–4.25% range, in line with expectations, and signalled two more cuts this year. Powell emphasised a “meeting-by-meeting” approach, balancing high inflation, labour market weakness, and already elevated asset valuations. The dot plot projects two cuts in 2025, followed by one in 2026 and another in 2027.
Our roadmap last month saw the U.S. economy cooling first before warming again. After the latest data and Fed stance, we adjust: the “cold” is less cold. We now assign a 55% probability to slowdown, down from 65%, with the balance being that the market simply rejects the slowdown narrative.
The bearish case remains tariffs and labour market weakness outside the AI sector. But AI itself has become too large to dismiss — like a bonfire in a cold night, as long as participants cluster around it, the market stays warm. Meanwhile, the inflationary narrative is gaining traction.
These positions work in both a softer “cold” scenario and in a transition to “hot.”
📈 Portfolio Implications – Inside the Model Portfolio
Our Model Portfolio is up +30% YTD as of late September. we believe we are in good shape as it remains barbellled: quality companies and gold provide resilience today, with optionality for tomorrow.
Insert performance & allocation here
Strategy outlook:
Near-term: quality megacaps, gold
Mid-term: prepare to rotate into cyclicals, small caps, and steepeners as the “hot” phase takes hold.
No allocation changes were made this week. The latest portfolio adjustments will be detailed in our premium section — thank you for your continued support.
Bottom Line
So, are we in a bubble?
Earnings and liquidity still support the rally. Compared to the dot-com era, we are probably still not there. But that comparison risks downplaying today’s risks. Powell has already said asset prices are high, valuations are stretched, and retail speculation is creeping up. The caveat is clear: this cycle is priced for near-perfection.
That’s why we have chosen to participate with caution — trimming exposures, hedging risk, and leaning on quality names rather than chasing momentum. The good thing about investing is that you don’t need to be dead-certain about a black-or-white outcome. You can structure a strategy that benefits if the cycle extends, while protecting if it falters.
Today’s market is like a pot just below a boil — bubbles forming at the edges, not yet a rolling boil. Stay invested, but stay alert.
Keep in touch with Genuine Impact!
Instagram | X/Twitter | LinkedIn
Created by Arya and David