The Bubble Paradox: Why Modern Markets Refuse to Crash
đź“šWhat You Will Learn
- Stages of financial bubbles per Minsky's theory.
- Why competition logic breaks in late-cycle markets.
- Factors propping up markets despite extreme valuations.
- 2026 pitfalls like AI spending and geopolitics.
đź“ťSummary
ℹ️Quick Facts
- Equity multiples stretched to late-1990s levels, yet no crash.
- AI hype drives massive CapEx, but revenues lag market pricing.
- S&P 500 inches higher in messy rotations without clear leadership.
đź’ˇKey Takeaways
- Markets persist due to liquidity saturation and AI euphoria, not fundamentals alone.
- Volatility rises in 2026 from policy uncertainty and overvaluation, but no full bubble burst yet.
- Diversification beyond Magnificent 7 offers opportunities amid sector churn.
Markets hit record highs with valuations echoing 1999 dot-com peaks, yet they refuse to crash. This paradox stems from 'irrational exuberance' fueled by AI narratives, where investors bet on utopian growth despite lagging revenues.
Hyman Minsky's stages—displacement, boom, euphoria—describe the shift from hedge to speculative financing. Today, liquidity chases AI dreams, enabling even laggards to soar without discrimination.
AI triggers massive CapEx, but the global economy may lack capacity to justify it quickly. Tech stocks dipped in late 2025 on spending fears, yet broader markets grind higher.
Skepticism grows, but no full euphoria yet—unlike dot-com's triple-digit sales multiples for loss-makers. Greater Fool Theory thrives in fringes like crypto, hinting at excess without systemic risk.
Abundant global liquidity and US strengths—productivity, demographics, energy independence—buoy equities. Positive growth and disinflation persist, defying 2024 downturn calls.
Policy uncertainty, from Fed leadership to tariffs, adds noise but no killer blow. Main Street-Wall Street disconnect and dollar weakness despite growth create unease, not collapse.
Expect bumps: AI bubble fears, sticky inflation, geopolitics, D.C. shutdowns. Messy rotations plague tapes, with mega-caps stalling and small caps catching spillovers.
Overvaluation and leverage signal correction risk, possibly Q1 2026 or later. Yet, breath broadens, suggesting no straight-line boom or bust.
Breakdown in competition logic warns of late-cycle risks; diversify beyond MAG 7. History shows bubbles burst post-euphoria—monitor psychology over metrics.
Position for turbulence: watch CapEx returns, policy shifts, and sector breadth for clues.
⚠️Things to Note
- Bubbles confirmed only post-collapse; current signs are warnings, not certainties.
- US advantages like productivity and energy self-sufficiency fuel resilience.
- Government shutdown risks and D.C. turbulence could spike yields.