Visualizing the Anatomy of a Stock Market Bubble
The Anatomy of a Stock Market Bubble
Over the past decade, the NASDAQ Composite Index has quadrupled, leading to inflated valuations. But does this signal an emerging asset-price bubble?
In this graphic, from Picton Mahoney Asset Management, we show the key indicators of a stock market bubble and how today’s market conditions stack up.
Historic Stock Market Bubbles vs. the AI Boom
Since September 2022, AI stocks have surged over 250% amid investor euphoria, driving the lion’s share of the S&P 500’s gains. Below, we show how these returns compare to historic bubbles:
| Asset Bubble | Index | Peak Date | % Rise to Peak | % Drop from Peak |
|---|---|---|---|---|
| Roaring Twenties | Dow Jones Industrial Average | Sep 1929 | 451.2% | -66.3% |
| End of the Gold Standard | Daily London A.M. Fix Gold Prices | Jan 1980 | 1,729.4% | -54.6% |
| Japanese Asset Price Bubble | Nikkei 225 Index | Dec 1989 | 407.9% | -40.6% |
| Dot-Com Bubble | NASDAQ Composite Index | Feb 2000 | 538.2% | -56.8% |
| Chinese Stock Market Bubble | Shanghai Composite Index | Oct 2007 | 315.9% | -48.2% |
| Housing/Commodity Bubble | West Texas Intermediate | Jul 2008 | 380.2% | -48.1% |
| AI Bubble | CNBC Magnificent 7 Index | N/A | 251.3%* | N/A |
*Data from 9/1/2022 to 1/27/2025. Sources: Macrotrends data from 9/9/1921 to 7/8/2010, CNBC data from 9/1/2022 to 1/27/2025.
As AI-related stocks have soared, key indicators are flashing red across financial markets.
While there is no exact definition of a market bubble, the following characteristics are common features of assets entering speculative territory:
- Market sentiment: Nearly 53% of Americans expect stock prices to rise in 2025, surpassing the long-term average of around 35%.
- Stretched valuations: The S&P 500 cyclically adjusted price-to-earnings ratio (CAPE) stands at 38, compared to the historical average of 18.
- Irrational exuberance: Equities make up 43% of Americans’ household financial assets, the highest level ever recorded.
Going further, market bubbles throughout history have often emerged alongside new technologies—from railroads to the internet—much like AI today.
The Bubble Indicator Checklist
Although spotting a bubble can be challenging, several factors can help contextualize today’s market climate, shown in the table below:
| Indicator | Level | Description |
|---|---|---|
| Spiking Volatility | 🟡 Low | The CBOE Volatility Index (VIX) averaged 15.6 in 2024, the lowest annual average in five years. |
| Spike in Rates | 🟠 Neutral | U.S. 10-Year Treasury Yields have steadily risen to 4.6% from their 2024 lows of 3.6% |
| Policy Stimulus | 🟠 Neutral | The Federal Reserve cut interest rates by 75 basis points over 2024. |
| Market Concentration | 🔴 Extreme | In 2024, Magnificent Seven stocks drove 53% of the S&P 500’s total returns. |
| Price Momentum | 🔴 Extreme | Momentum stocks had one of their best years in over two decades. |
| Complacency | 🔴 Extreme | Despite abnormal valuations, investors justify staying invested. |
| Valuations | 🔴 Extreme | The S&P 500 CAPE ratio is 38, higher only during the Dot-Com Bubble and 2021. |
Data as at 12/2024.
With many factors at extreme levels, unexpected risks such as geopolitical shocks and resurging inflation could significantly jolt financial markets.
Preparing for What’s Ahead
To reduce risk exposure, advisors can consider multi-asset strategies with Picton Mahoney Asset Management’s Innovative Portfolio of 40% equities, 30% bonds, and 30% alternatives— instead of betting big on a brewing asset bubble.
Download The 2025 Picton Report.
