Marks suggests six INVESTCON levels that investors can use as markets get bubbly.
6. Stop buying.
5. Reduce aggressive holdings and increase defensive holdings.
4. Sell off the remaining aggressive holdings.
3. Trim defensive holdings as well.
2. Eliminate all holdings.
1. Go short.
Marks says it’s typically unwise to go to extremes, “but I have no problem thinking it’s time for INVESTCON 5. And if you lighten up on things that appear historically expensive and switch into things that appear safer, there may be relatively little to lose from the market continuing to grind higher for a while – or anyway, not enough to lose sleep over.”
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the meaty bit:
…With a new breed of tech giants pushing Wall Street to record levels in the past 12 months, Marks has been back on bubble watch.
In January, with the S&P 500 trading at 22 times forward earnings, Marks concluded that the market looked “lofty but not nutty” and called out the absence of the “extreme investor psychology” that usually marks genuine bubbles.
But with the market swooning after US President Donald Trump’s infamous “liberation day” tariff announcements and storming back to set a series of fresh record highs, Marks has dusted off his bubble measure for a second look.
His conclusion? “The stock market has moved from ‘elevated’ to ‘worrisome’.”
It’s the combination of two factors that contribute to that view. The first is that valuation remains elevated, having come back to about 23 times forward earnings; as Marks points out, historical data shows that when you buy the index at this level, your average return over the next decade will probably be plus or minus 2 per cent. That’s hardly brilliant compensation for risk, given 10-year US Treasury yields are sitting a touch above 4.2 per cent.
Clearly, Wall Street has been pushed higher by the big tech stocks. But these aren’t the stocks that necessarily worry Marks, given their average price is 33 times earnings.
“This is certainly an above-average figure, but I don’t find it unreasonable when viewed against what I believe to be the companies’ exceptional products, significant market shares, high incremental profit margins, and strong competitive moats,” Marks says, noting that when he arrived on Wall Street in 1969, several members of the so-called Nifty 50 – a group of stocks whose market dominance and earnings potential seemed unimpeachable – traded on prices of between 60 and 90 times earnings.
So what does concern Marks?
“I think it’s the average price-earnings ratio of 22 on the 493 non-Magnificent companies in the index – well above the mid-teens average historical P/E for the S&P 500 – that renders the index’s overall valuation so high and possibly worrisome.”
That’s because he sees a set of macroeconomic conditions that “appear to me to be less good overall than they were seven months ago”, including the threat of tariffs, rising inflation that could derail interest rate cut bets, slower growth that may dull multiyear earnings power, and America’s unresolved problem with huge fiscal deficits and national debt.
These are the fundamentals. But as Marks says, a bubble is less a diagnosable condition and more a state of mind, so the psychology of investors is important. And here, Marks sees signs of a shift.
There’s the market’s willingness to treat bad news as good news and the rationalisations for the bull market to keep running, including the TACO (Trump always chickens out) trade. There’s the creeping sense of FOMO, which is being compounded by a wealth effect from gains in stocks, property, crypto and gold. And of course, there’s “the excitement surrounding today’s new, new thing: AI”.
This is where Marks, to his credit, is willing to explore the idea that this time could indeed be different; as he points out, even the legendary investor Sir John Templeton, who was one of the first to warn of the dangers of “this time it’s different”, conceded it was still true about 20 per cent of the time.
The argument, Marks says, that technology is creating a new breed of companies that can grow faster, are less cyclical, are less capital intensive and have wider economic moats is logical – even if history says it’s very difficult for a firm to maintain this position for a long time.
Further, Marks agrees the likelihood that AI and related developments can change the world looks enormous, even if the investors have an unfortunate habit in periods like this of treating “far too many companies – and often the wrong ones – as likely to succeed”.
Marks says overvaluation is impossible to prove and there’s nothing to suggest a correction is imminent.