Currently, Wall Street is filled with debates about the "U.S. Stocks bubble." Renowned investment master Howard Marks believes that while valuations may be somewhat bubbly, they do not seem crazy.

On Tuesday, Oak Tree Capital founder Howard Marks published a column in the Financial Times, discussing whether the current U.S. stock market is in a bubble. Marks believes that:

Although the expected PE of the S&P 500 Index is high at 23.6 times, it is not insane. I have not heard anyone say that there are "no prices too high to reach," and while the market prices are high and there may be some bubbles, it does not seem crazy to me.

Marks points out in his article that the exact sign of a bubble is irrational bubble thinking:

Compared to valuation parameters, a more effective way to judge a bubble is psychological diagnosis. A highly irrational boom—complete adoration of a group of companies or assets—leads people to be extremely afraid of missing the opportunity to participate in the bubble, firmly believing that these Stocks have "no prices too high to reach," especially when the latter is the exact sign of the bubble brewing.

Marks also states that bubbles are often associated with "new things," and excessive optimism about new things can lead to pricing errors:

Because bubble participants cannot imagine any negative impact, they often provide hypothetical successful valuations. In reality, only a few newcomers may thrive or even survive. An outstanding newcomer may be replaced, and disruptors may also be disrupted.

The following is the full text of the article:

Nowadays, many investors remain highly vigilant about asset price bubbles, fearing a repeat of past booms and busts.

Therefore, I am often asked whether there is a bubble surrounding the few stocks that lead the S&P 500 Index; the so-called 'Seven Giants' of Technology have dominated the index's trajectory in recent years and contributed disproportionately to the gains.

Bubbles can be identified through valuation metrics, but I've always believed that psychological diagnosis is more effective. What I look for is extreme irrational exuberance—a total adoration for a group of companies or assets that leads people to be extraordinarily fearful of missing out on the bubble, convinced that 'no price is too high' for these stocks. Particularly when I hear the latter, I view it as a definitive sign that a bubble is brewing. In short, bubbles are marked by bubble thinking.

If bubble thinking is irrational, then what causes investors to deviate from rational thinking? The answer is simple: new things. This phenomenon relies on another timeless investment adage: 'This time it’s different.' Bubbles are always associated with new missteps, from the fervor for new-imported tulips in the 1630s in the Netherlands to the Internet and Telecommunication Sector at the end of the 1990s. With no historical indicators for appropriate valuation of new things, nothing can anchor them to a solid foundation.

The bubbles I have experienced all involved innovation, many of which were either overvalued or not fully understood. The allure of new products or business models is often obvious, but the potential risks and pitfalls tend to be hidden. A new company may completely surpass its predecessors, but investors often fail to realize that even a promising newcomer could be replaced, and disruptors can themselves be disrupted, whether by technically superior competitors or newer technologies.

In the 1990s, investors were convinced that 'the Internet will change the world.' It indeed seemed that way at the time, and this assumption spurred a massive increase in demand for anything related to the Internet. E-Commerce stocks were initially listed at seemingly high prices, then quadrupled on the first day. Behind every frenzy and bubble there is usually a kernel of truth, just some of it is greatly exaggerated. The Internet did change the world, but the vast majority of Internet companies that soared during the late 1990s bubble ultimately became worthless.

Over-optimism about new things leads to pricing errors. Because bubble participants cannot imagine any downside risks, they often assign hypothetical success valuations. In reality, likely only a few newcomers will thrive or even survive.

Stocks are sold at multiples of future earnings, reflecting the expectation that they will continue to be profitable for many years to come. When buying a stock, you are purchasing a share of the company's earnings for the coming years. When stocks are purchased at a price-to-earnings (PE) ratio above the average, investors are paying for the company's profits for decades ahead, even when considering significant growth.

Today, companies leading the S&P 500 Index are far superior in many ways compared to the best companies of the past. They enjoy immense technological advantages and scale, but maintaining this is not easy, especially in the high-tech field, which is prone to disruption. During the bubble, investors treated leading companies as if they would surely maintain their positions for decades. Some have succeeded, while others have not, but change seems to be more common than permanence.

Is the US stock market too high? It is extremely rare for the S&P 500 Index to have a return of 20% or more for two consecutive years. This has happened in the past two years, with the S&P 500 Index rising by 24.2% in 2023 and 23.3% in 2024, and now we are approaching 2025. What will the future hold?

Today's warning signs include the prevailing optimism in the market since the end of 2022, the enthusiasm for AI as a new phenomenon, and the widely held assumption that the top seven companies will continue to succeed. On the other hand, the expected price-to-earnings (PE) ratio for the S&P 500 Index, while high, is not excessive, at 23.6 times. I also have not heard people say "there are no prices that are unreachably high," and while the market is expensive, possibly somewhat bubbly, it does not seem madly so in my view.