Capital Economics: "The American stock market does not have the characteristics of the speculative bubbles of the past"

The recent rise in the US stock market does not have the characteristics of the speculative bubbles of the past, believes John Higgins, chief economist of the research firm Capital Economics, according to Business Insider.

First, unlike the so-called "meme" stock frenzy of 2021 - when a community of retail investors and active traders on Reddit and other social platforms fueled the rise of titles like GameStop and AMC, including through sums received from state during the pandemic - at the moment the market does not show "obvious signs of high and increasing leverage", Higgins wrote in a note, according to the American publication.

According to the economist, if before the bursting of the dot com bubble and the Great Financial Crisis the household sector in the United States had become a net debtor, during the pandemic it became a net creditor, thanks to massive reductions in spending and substantial fiscal support. "Even though the household financial surplus has since declined from a very high level, it is now recovering slightly after briefly turning negative," says Higgins.

The chief economist of Capital Economics also points out that the ratio of leveraged debt to the size of the entire stock market is not at the levels reached before the crash of 1929 or the financial crisis of 2008. According to a chart presented by the economic research firm, after a set to increase in 2020-2021, the ratio continues to decline, currently being similar to the 2005 level.

Some market commentators argue that the shift from active to passive fund management is a driver for a potential speculative market bubble. The share of U.S. stock mutual funds that are considered to have a passive approach and ETFs has doubled over the past decade, to more than 60 percent at the end of last year, Bloomberg data shows. Capital Economics estimates that proportion may rise to 80% by 2030.

But Higgins does not see the dominance of passively managed funds as a variable leading to a speculative bubble in the stock market. "At the end of the day, whether the money is invested in active or passive funds should not influence how much of that money finds its way into stocks," he says, adding that passive funds do, however, give some comfort to investors to buy shares, given the lower fees.

Another element likely to form a speculative bubble is the recent excitement around artificial intelligence, with market growth driven mainly by a few big names in technology.

The proportion of S&P 500 companies mentioning artificial intelligence in last year's fourth-quarter reports hit an all-time high, and AI-related stocks such as Super Micro Computer, Arm and SoundHound have recently posted strong gains.

But analysts like Wedbush's Dan Ives aren't convinced that the AI hype is a nascent bubble. "AI is the most important technology trend we've seen since the internet began in 1995. I've been an analyst since the late 90s covering technology, and this is not a bubble, it's the beginning of the AI revolution," Ives wrote last week, according to Business Insider.