Potential Bubble Forming in the Stock Market? Investors Beware Lombardi Letter 2021-01-27 13:17:18 The returns on the stock market are exuberant at a time when the underlying fundamentals may not be so great. There could be a bubble forming on the stock market. Here’s the full story. Stock Market

Potential Bubble Forming in the Stock Market? Investors Beware

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stock market bubble

@mihacreative via Twenty20

The Current Stock Market Resembles Stock Market Bubble of 2000

Since the sell-off in March 2020, the stock market has shown robust gains. With this, one has to ask if there could be a bubble forming in the stock market.

Here’s some more perspective…


Since March, the S&P 500 has soared more than 47%. The Dow Jones Industrial Average has shown a similar performance.

Meanwhile, the NASDAQ Composite Index has surged over 64%.

If you look at individual stocks, they have shown nothing but stellar gains.

Consider this: since March lows, Apple Inc. (NASDAQ:AAPL) is up over 100%. Tesla Inc (NASDAQ:TSLA) has seen its stock price skyrocket 390%. Beyond Meat Inc (NASDAQ:BYND) has jumped over 220%. Mind you: this is just a sample of the well-known names. The full list of stocks showing significant gains over such a short period of time is too big to mention here.

Know this: according to a Dow Jones Market Data analysis of companies that had capitalization of $100.0 million at the beginning of 2020, more stocks have surged at least 400% at some point in the first three quarters of this year than at any time since 2000! (Source: “These Stocks Have Rallied More Than 400% This Year,” The Wall Street Journal, September 30, 2020.)

What’s a Bubble?

Before going into any details, it’s important to clarify what constitutes a bubble.

In simple terms: a bubble occurs when returns are exuberant relative to the historical averages and investors’ sentiment suggests that these sort of returns will continue.

The returns we see on the stock market these days are just that. The bounce from the March lows is very abnormal.

As for investor sentiment, it’s extremely bullish.

Have you seen the financial news recently? You rarely see any calls for common sense, while noise for higher returns gets louder each day. If you listen to the big banks and investment houses, a large number of them are bullish. They expect indices like the S&P 500 to end close to 3,800 in 2021. Currently, it stands at around 3,400. So, they think another 11% move to the upside is ahead.

Stock Market Outlook: Stock Investors Could Be Severely Disappointed

Dear reader, yes, there could be a bubble brewing in the stock market.

We see markets surging on the back of very weak fundamentals—there’s still a lot of uncertainty around earnings, economic conditions are dire, consumer sentiment is weak, and a pandemic rages on. This is not good.

Plus, if you look at it from a valuations perspective, stock markets are extremely overvalued. This only makes the case for a bubble much stronger.

Let me just say this: those who are buying now could be severely disappointed. Don’t get complacent.

I know bubbles can go on for a while. But not forever. I wouldn’t be shocked if we see little more upside, but I fear how bad the downside could be. A stock market crash could be right around the corner.

How to play all of this? I can’t stress this enough: be selective. Look for stocks that have been ignored and are trading at low valuations relative to the market and their peers, but that have attractive business in place.

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