Under the new high of the US stock market, hidden crises! UBS Group AG: 8 bubble warning signals, with 6 already appearing

According to the Zhitong Finance and Economics APP, in the past year, due to the hype around artificial intelligence driving the US stock market to record highs, there has been much discussion about a stock market bubble.

UBS strategist Andrew Garthwaite outlined eight warning signals of a stock market bubble in a recent report, with six of them already beginning to show.

This indicates that while the stock market has not yet experienced a bubble, it may soon.

"The upside risk is that we will eventually fall into a bubble. If we are in such a situation, then we believe it is more similar to 1997 than 1999."

This is important because once a stock market bubble bursts, the decline often reaches 80%, but Garthwaite stated that the situation is not that dire yet.

Garthwaite said: "If the stock market repeats the scenario of 1997 rather than 1999, then we will invest based on bubble theory."

According to Garthwaite, here are the eight warning signals of a stock market bubble:

1. End of a Structural Bull Market (Already Evident)

Garthwaite stated: "When historical stock returns are significantly higher than bond returns, bubbles often occur. Therefore, investors predict future returns by inferring historical returns, when in fact, as shown by ERP (Equity Risk Premium), future returns are much lower than normal levels."

2. Corporate Profits Under Pressure (Already Evident)

Although profits of S&P 500 index component companies have been soaring over the past year, there is another indicator of measuring corporate profits that investors should pay attention to.

NIPA measures the profitability of all companies (including private companies), and when there is a difference between it and the profits of listed companies, investors should take note.

"If we look back at the TMT (Technology, Media, and Telecommunications) bubble period, we will find this. At that time, NIPA profits declined while listed company profits rose. The late 1980s in Japan were also like this."

3. Market Breadth Decline (Already Evident)

When a few companies are driving most of the stock market gains, it indicates narrow market breadth.

As the concentration of mega-cap tech stocks reaches record levels, this situation has been ongoing, as median stocks have failed to deliver strong returns Garthwaite said, "If we observe the ups and downs of the S&P 500 index during the TMT period, this point is particularly clear."

4. 25 years since the last bubble (already evident)

Garthwaite said, "This has led a large number of investors to believe 'this time is different,' and based on this inference, the stock market should be at a lower ERP level structurally."

5. 25 years since the last bubble (already evident)

Garthwaite stated, "This argument revolves around dominance or more typically around technology. In the 19th century, there was a bubble related to railways, and in the 20th century, before 1929, there was a bubble related to mass production of automobiles, urban electrification, and radio."

6. Retail investors are actively participating (already evident)

When retail investors buy stocks in large quantities, the stock risk premium drops to very low levels, leading to soaring valuations.

Garthwaite said, "There is some evidence to support this, such as the very high long/short ratio of individual investors relative to normal levels."

7. Monetary policy is too loose (not yet evident)

Previous bubbles occurred when real interest rates fell significantly. However, this has not happened yet as the Fed has not cut interest rates.

"Relative to the output gap, the current monetary conditions appear unusually tight," Garthwaite said.

8. Limited duration of a long decline (not yet evident)

In previous stock market bubbles, the market experienced several years of limited selling, with declines of less than 20%.

The S&P 500 index experienced a painful bear market in 2022, with a decline of over 25% at its low point, so there may still be a long way to go to meet this condition