Albert Edwards, a global strategist at Société Générale renowned for his bearish market predictions, has sounded the alarm on what he perceives as a new bubble forming in U.S. stocks. Edwards draws parallels between the current market rally and the dot-com crash of 2000, citing factors such as the proliferation of artificial intelligence (AI) and the loose monetary policy of the Federal Reserve as catalysts for the bubble.
One of the key indicators of a bubble, according to Edwards, is the surge in stock prices without corresponding earnings growth. While the stock market has soared in recent months, driven by the narrative of an “artificial intelligence revolution” expected to boost corporate earnings, the reality is that AI has yet to significantly impact earnings growth for most companies. This discrepancy has led to expensive valuations relative to historical averages, with the S&P 500 trading at more than 20 times forward earnings, its highest level since January 2022.
Despite the hype surrounding AI, analysts’ earnings revisions have failed to keep pace with the market rally. This divergence from past trends, where analyst optimism closely tracked the performance of the S&P 500, suggests a disconnect between stock prices and underlying fundamentals.
According to Edwards, the true driver of the market’s strength lies in the abundant liquidity provided by the Federal Reserve’s monetary policy. Despite the Fed’s quantitative tightening efforts to reduce its bondholdings, the central bank’s money-market operations have effectively offset this liquidity drain by injecting more money into the financial system. This expansion of the monetary base contradicts the Fed’s claims of draining liquidity, highlighting the disconnect between policy rhetoric and market realities.
Additionally, Edwards notes the significant fiscal stimulus provided by the federal government, which has supported economic growth and consumer spending despite the Fed’s interest rate hikes. The combination of loose monetary policy, fiscal stimulus, and consumer spending has buoyed the economy, masking underlying vulnerabilities in the stock market.
Drawing from his experience during the dot-com bubble, Edwards warns investors to remain cautious amidst the current market euphoria. Despite a strong start to the year, U.S. stocks have faced volatility in the second quarter, underscoring the fragility of the market and the potential risks of a market correction.