Original author: Dong Jing

Original source: Wall Street News

As more and more billionaires and market participants proclaim that the AI-driven stock market is forming a bubble, Oak Tree Capital co-chairman Howard Marks presents a counterintuitive judgment: the fact that everyone is talking about a bubble may mean that the bubble is far from bursting.

According to Bloomberg on October 18, Howard Marks stated in an interview that he does not currently believe that the market has reached a true bubble state. His core logic is that one of the essential characteristics of a bubble is investors' “obliviousness” to risk, and when Wall Street is vigilant about bubble risks, this “obliviousness” is notably absent. “If enough people are cautiously questioning whether there is a bubble in a particular area, then there is every reason to believe that even if it is a bubble, the market will behave quite restrained,” Howard Marks said.

This judgment stands in stark contrast to the current tense market sentiment. From Ray Dalio to billionaire Michael Novogratz, several hedge fund giants have publicly warned that AI trading is pushing the stock market to the edge of a bubble. After the Nasdaq 100 index hit a new all-time high earlier this month, it immediately fell 5.5% last week, with some market participants attributing this to a concentrated release of bubble anxiety.

Definition of a bubble: Howard Marks's three core criteria

Howard Marks issued a warning at the peak of the internet bubble in 2000 and stated last year that he was in a “bubble watch” state. He admits that the term “bubble” itself is “ambiguous,” but

he describes a bubble as “irrational exuberance, recklessness, and obliviousness.” In his view, the most typical characteristic of a bubble is the market evolving into a public frenzy—“some people are becoming absurdly rich, while anyone not participating feels foolish and regrets it deeply.”

In light of this framework, Howard Marks's current assessment is: investors do exhibit a “fear of missing out” (FOMO) on further gains, but the ongoing discussion of bubble risks itself indicates that the market has not fallen into a state of “obliviousness”; meanwhile, in terms of another signal—investor reckless behavior—the signals are equally mixed.

Valuation data: Significant differences compared to 2000

An important basis supporting Howard Marks's judgment is the current valuation level. The forward price-to-earnings (P/E) ratios of the S&P 500 and Nasdaq 100 have actually decreased this year due to the market's expectations of strong corporate earnings growth, showing no obvious bubble characteristics.

The differences are particularly striking when compared to the month before the peak of the internet bubble in 2000: at that time, the five largest tech stocks in the S&P 500 had an average forward P/E ratio of about 65 times, while the current number for the largest five tech stocks is about 23 times.

However, another valuation metric has left some investors feeling uneasy. The cyclically adjusted price-to-earnings ratio (CAPE, also known as Shiller P/E) is currently around 41 times, close to the historical record of 44 times set in 1999. DataTrek Research co-founder Nicholas Colas refers to it as “the most alarming valuation chart circulating in the market.”

Michael O'Rourke, chief market strategist of JonesTrading, takes a cautious stance on the decline of forward P/E ratios. He points out that large tech companies are heavily borrowing to build AI infrastructure, and corporate leverage usually compresses valuation multiples, which does not necessarily mean that valuations are reasonable.

“We have pushed vendor financing to a whole new level—chip manufacturers themselves need to subsidize the purchase of their products, otherwise these purchases simply won’t happen.”

Market concentration and technical warning signals

Beyond valuations, the high concentration of market structure has also raised concerns. Currently, Nvidia, Apple, and Microsoft together account for about 21% of the S&P 500 index weight, while in October 1999, it took nearly ten stocks to achieve the same weight.

On the technical side, traders have noted several signals similar to those seen during historical bubble periods, including the semiconductor sector's price movements closely mirroring those of past bubble periods, significant divergence between the best and worst performing technology stocks, and a persistent narrowing of market breadth.

The Nasdaq 100 index's 250 percentage points of excess returns relative to the S&P 500 index over the past ten years have also made it difficult for many investors to easily abandon tech stock exposure. “Even if you have some concerns about tech stocks, you cannot give them up. It would nearly seem foolish to give them up because they always outperform,” said veteran investor Jim Paulsen.

Sentiment signals: Euphoria and caution coexist

In terms of investor sentiment, this year's overall performance has yet to reach the levels of euphoria seen during historical bubble periods.

High inflation, uncertainties surrounding the midterm elections, and the war in Iran have caused traders to choose defensive actions at multiple points in 2026, with the Nasdaq 100 index undergoing multiple pullbacks, including a complete 10% adjustment.

However, signs of euphoria are not entirely absent. Broadcom CEO Hock Tan publicly stated that the AI frenzy has attracted a group of investors who are “completely unaware of what they are investing in,” behaving “as if in a casino.” CFRA Chief Investment Strategist Sam Stovall shared a detail:

While speaking with a newsstand owner in New York, the owner asked him to print research reports on AI-related stocks for Intel and Cisco—this scene evokes the famous anecdote before the 1929 stock market crash when Joseph Kennedy received stock tips from a shoeshine boy.

How bubbles burst: The credit market is key

Even though the current bubble is not yet mature, market participants are closely watching for potential catalysts that could trigger a reversal. Reynolds Strategy Chief Market Strategist Brian Reynolds pointed out, “Typically, it is problems in the credit market that end a cycle. Real trouble begins when people encounter unmet margin calls in the credit market.”

The rapid rise in interest rates has begun to put pressure on some market darlings. CoreWeave's stock price nearly doubled from January to early May this year, but last week's market decline turned its year-to-date gains negative, and its bond yields soared as well.

O'Rourke emphasized that the bursting of a bubble is often not due to the failure of the technology itself, but because excessive optimism leads to overstretched valuations. “Investors become overly confident and then pay too high a price. That is the essence of bubble thinking. AI will change the world, there is no question about it.” He said, “The question is how much is it worth paying for it.”

During the internet era, the technology itself achieved great success, but when earnings fell short of expectations and interest rates rose, the concentrated stock market gains began to reverse. The historical trajectory is being repeatedly examined by current market participants.

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