Key Takeaways
A Goldman Sachs partner is warning clients that the US stock market is in a "frenzied rally" with "a hint of the 2000's bubble," as a narrow group of technology stocks pushes indices to record highs.
"The current price action in US equities has a hint of the 2000's bubble," Rich Privorotsky, a partner in Goldman's sales and trading division, wrote in a recent client note. He described the market as being in a state of "upward frenzy."
The warning centers on a market driven almost entirely by technology and semiconductor stocks, with Privorotsky noting that call option skew has gone nearly vertical and commodity trading advisor (CTA) strategies are fully positioned for more gains. This enthusiasm, however, is contrasted by a narrowing market breadth and emerging signs of weakness in the consumer sector.
The note echoes concerns from other prominent investors like Paul Tudor Jones, who recently pointed out that the total US stock market capitalization is now 252% of the nation's GDP. For context, that figure was just 65% before the 1929 crash and 170% at the peak of the dot-com bubble in 2000, according to an analysis by Jones.
Despite the bubble warning, Privorotsky advised clients that fighting the trend is "futile," suggesting the correct tactical approach may be to "embrace the long side" for now. As a self-described contrarian investor, however, he questioned the sustainability of the rally's foundations.
A core concern raised in the note is the narrative around artificial intelligence. While acknowledging the long-term demand for AI-driven semiconductors, Privorotsky questioned if enough of that demand will shift to cheaper, distributed computing solutions. He noted that smaller, open-source AI models can already run on local devices like his own 2023 MacBook Pro, potentially diluting the extreme concentration of demand for high-end chips that has fueled the semiconductor rally.
Privorotsky's concerns align with a growing chorus of warnings about stretched US equity valuations. Paul Tudor Jones has stated that the S&P 500's current price-to-earnings ratio of 22 has historically implied negative 10-year forward returns for investors buying at these levels.
This valuation risk is compounded by a shift in market supply dynamics. For the past decade, US companies have been net buyers of their own stock, retiring about 2% of the market's value annually, according to Interactive Brokers data. Jones noted this trend is now reversing as a wave of large IPOs is set to bring hundreds of billions in new share supply to the market.
The note from Goldman Sachs suggests the risk-reward for chasing the rally is becoming increasingly asymmetric. While the upward momentum could continue, the combination of extreme sentiment, narrowing leadership, and looming supply suggests potential for significant instability. Investors will be closely watching inflation data and geopolitical developments for any catalyst that could disrupt the current trend.
This article is for informational purposes only and does not constitute investment advice.
