A billionaire investor who predicted the dot-com crash 25 years ago warned that he is ‘on bubble watch’ as warning signs appear to have cropped up in the market. 

Howard Marks, one of the most respected value investors, pointed out cautionary signs in the stock market that could mean poor returns over the long term or a large decline nearer term. 

‘It shouldn’t come as a surprise that the return on an investment is significantly a function of the price paid for it. For that reason, investors clearly shouldn’t be indifferent to today’s market valuation,’ Marks wrote in his latest memo. 

He said that, although he doesn’t believe a bubble poses an immediate threat, there are signs he’s noticing that may speed up the process. 

These include the market optimism since late 2022, Artificial Intelligence enthusiasm, a reliance on tech giants, and index investing bias. 

Marks said that the above average valuation on the S&P 500, and the fact that its stocks in most industrial groups sell at higher multiples than stocks in those industries in the rest of the world, was one of the ‘cautionary signs’ of a bubble. 

He also mentioned Bitcoin, and said: ‘Regardless of its merit, that fact that its price rose 465% in the last two years doesn’t suggest an overabundance of caution.’ 

‘A bubble not only reflects a rapid rise in stock prices, but it is a temporary mania characterized by -or, perhaps better, resulting from – the following: highly irrational exuberance, outright adoration of the subject companies or assets and a belief that they can’t miss, massive fear of being left behind if one fails to participate, and a resulting conviction that, for these stocks, “there’s no price too high”,’ Marks wrote. 

Howard Marks, one of the most respected value investors, pointed out cautionary signs in the stock market that could mean poor returns over the long term or a large decline nearer term

Marks said that the above average valuation on the S&P 500, and the fact that its stocks in most industrial groups sell at higher multiples than stocks in those industries in the rest of the world, was one of the ‘cautionary signs’ of a bubble

Yet, he also offered counterarguments to his points stating that the p/e ratio on the S&P 500 is high ‘but not insane.’ The top performing seven companies, dubbed the ‘Magnificent Seven’ are great companies who may have warranted high p/e ratios

Looking at examples of the 2000 bubble, he highlighted the twenty companies that were the most heavily represented in the index. 

At the beginning of 2024, only six of them were still in the top twenty. Microsoft Inc, one of today’s top leading companies, was in the top twenty 25 years ago. 

‘In bubbles, investors treat the leading companies – and pay for their stocks – as though the firms are sure to remain leaders for decades,’ he said.  

Marks notably took trouble with the enthusiasm behind AI, which he believed may have been extended to other high-tech areas. 

Yet, he also offered counterarguments to his points stating that the p/e ratio on the S&P 500 is high ‘but not insane.’ The top performing seven companies, dubbed the ‘Magnificent Seven’ are great companies who may have warranted high p/e ratios. 

Marks added that he hadn’t heard people saying, ‘there’s no price too high’, which he considered a sure sign of a bubble, and he said that, while high-priced, the markets don’t appear to be extreme. 

He concluded: ‘I’m not an equity investor, and I’m certainly no expert on technology. Thus, I can’t speak authoritatively about whether we’re in a bubble. I just want to lay out the facts as I see them and suggest how you might think about them… just as I did 25 years ago.’