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In the U.S., inflation remains high, threatening plans for a rapid rate cut, but markets remain bullish. Could another bubble be on the horizon?
According to Ray Dalio, former head of hedge fund Bridgewater Associates, it is not likely. Even in the tech giants, he sees no warning signs. While valuations may be a bit high considering current and projected earnings, they are not overly so.
Take Nvidia, for example. Although the company’s market capitalisation has increased tenfold, with Nvidia stock reaching a new all-time high, its earnings have also seen a significant boost and are expected to grow over the next 1-2 years.
As for other signs of a bubble, such as the influx of inexperienced investors, high levels of market indebtedness and the flurry of IPOs and mergers and acquisitions, Dalio believes they are all within normal limits.
But does this mean that a correction is not on the horizon?
A sudden crash seems unlikely as long as investors have liquidity and maintain a generally optimistic view of the future. In light of this, it is not surprising that trading volumes in U.S. stock options are reaching all-time highs.
This is especially true for semiconductor stocks such as Nvidia, Advanced Micro Devices and Micron Technology. Despite initial setbacks and inherent risks, the potential for substantial gains keeps investors hooked on these volatile market bets.
After all, as the saying goes, “You only live once.”
The worrying thing, however, is that this trend has attracted many novice investors seduced by the stories of significant gains shared on social media despite the high stakes. And, as history shows, this usually ends poorly.
So what now?
Although the technical picture may look manageable, the economic situation leaves much to be desired, especially given the 18% increase in bankruptcies in 2023 and the high consumer debt levels, likely to dampen consumption.
Overall, there are plenty of challenges in the economy. Predicting the exact trigger for a crash is like shooting blind. But one thing is sure: throughout history, rapid growth spurts have always ended with the same correction.
So, even if Dalio is right and there is no bubble in the market, economic factors suggest a gloomy outlook, so it is crucial to keep an eye on trend reversal indicators such as volume, resistance and support levels.
