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.