Howard Marks: If everyone is talking about a bubble, then the bubble may not have burst yet

As more billionaires and market participants shout that the AI-driven stock market is forming a bubble, Oak Tree Capital co-chairman Howard Marks has offered a counterintuitive judgment: precisely because everyone is talking about the bubble, it may be far from the moment of bursting.

According to a report by Bloomberg on October 18, Howard Marks stated in an interview that he does not currently believe 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 on high alert for bubble risks, this "obliviousness" is precisely absent. "If enough people are cautiously questioning whether there is a bubble in a certain area, then there is every reason to believe that even if it is a bubble, the market will behave very restrained," said Howard Marks.

This judgment sharply contrasts with the current tense sentiment in the market. 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 historic high earlier this month, it subsequently fell 5.5% last week, with some market participants attributing this to a concentrated release of bubble anxiety.

Definition of a Bubble: Howard Marks' Three Core Criteria

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

he describes a bubble as "irrational exuberance, recklessness, and obliviousness." In his view, the most typical characteristic of a bubble is that the market evolves into a public frenzy—"some people are becoming absurdly wealthy, while anyone who is not involved feels foolish and regrets it deeply."

In light of this framework, Howard Marks' current assessment is that investors do exhibit "fear of missing out" (FOMO) regarding further gains, but the ongoing discussion about bubble risks itself indicates that the market has not fallen into a state of "obliviousness"; and regarding another signal—investor recklessness—the signals are similarly mixed.

Valuation Data: Significant Differences Compared to 2000

An important basis supporting Howard Marks' judgment is the current valuation levels. Looking at the forward price-to-earnings ratios (forward P/E) of the S&P 500 and Nasdaq 100, this metric has actually declined this year due to the market's strong expectations for corporate earnings growth, showing no obvious signs of bubbling.

The difference is particularly striking compared to the month before the peak of the 2000 internet bubble: at that time, the average forward P/E of the five largest tech stocks in the S&P 500 was about 65 times, while the current figure 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 about 41 times, close to the historical record of 44 times set in 1999. Nicholas Colas, co-founder of DataTrek Research, referred to it as "the most disturbing valuation chart circulating in the pre-market."

Michael O'Rourke, chief market strategist at JonesTrading, expressed reservations about the decline in forward P/E. He pointed out that large tech companies are heavily borrowing to build AI infrastructure, and corporate leverage typically compresses valuation multiples, which does not necessarily mean 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

In addition to valuations, the high concentration at the structural level of the market has also raised concerns. Currently, Nvidia, Apple, and Microsoft together account for about 21% of the S&P 500 index weight, whereas in October 1999, it took nearly ten stocks to reach the same weight.

On the technical side, traders have noticed several signals similar to those during historical bubble periods, including the performance trends of the semiconductor sector closely matching those of previous bubble periods, a huge divergence between the best and worst-performing tech stocks, and a continued narrowing of market breadth.

The Nasdaq 100 index's 250 percentage points of excess returns relative to the S&P 500 over the past decade have also made it difficult for many investors to easily abandon tech stock exposure. "Even if you have some concerns about tech stocks, you can't give them up. Giving them up seems almost foolish 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 not reached the euphoric levels seen during historical bubble periods.

High inflation, uncertainty surrounding the midterm elections, and the war in Iran have led traders to choose defensive operations at multiple time points in 2026, and the Nasdaq 100 index has also experienced several pullbacks, including a complete 10% adjustment.

However, signs of euphoria are not entirely absent. Broadcom CEO Hock Tan publicly stated that the AI craze has attracted a group of investors who "have no idea what they are investing in," and their behavior is "like being in a casino." CFRA chief investment strategist Sam Stovall shared a detail:

When he spoke 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 heard stock tips from a shoeshine boy.

How Bubbles Burst: The Credit Market is Key

Even if the current bubble is not yet mature, market participants are closely monitoring potential catalysts that could trigger a reversal. Brian Reynolds, chief market strategist at Reynolds Strategy, 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 between January and early May this year, but last week's market decline turned its year-to-date gains negative, and its bond yields have also surged significantly.

O'Rourke emphasized that the bursting of a bubble often does not occur due to a failure of the technology itself, but rather because excessive optimism leads to overextended 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 doubt about that," he said, "The question is how much to pay 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 trajectory of history is being repeatedly examined by current market participants.