Stocks are expensive and retail inflows are soaring, but Goldman Sachs says history shows the market is not in a bubble

Stocks are expensive and retail inflows are soaring, but Goldman Sachs says history shows the market is not in a bubble
Goldman said fears of a bubble are overblownJohannes Eisele/Getty Images
  • Although stock valuations are expensive and retail inflows are soaring, Goldman's Peter Oppenheimer says the market is not in a bubble.
  • The chief global equity strategist detailed how many high stock prices are justified by historically low interest rates.
  • He also said that he doesn't see the same levels of broad speculation in the market that occurred in previous bubbles.
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The narrative that the stock market is in a bubble has been growing on Wall Street as valuations and retail inflows reach new heights. But Goldman Sachs' chief global equity strategist says the market isn't in a full fledged bubble.

Petter Openheimer, who is also Goldman's head of marco research in Europe, led a study that looked back over 300 years of markets and market bubbles. His team found that there's a number of properties that are typically characteristic of a market bubble: excessive price appreciation, extreme valuations, a narrative that investing has reached a "new era," increased market concentration, high speculation, strong investor inflows, and strong corporate activity. He summed up his study on a Tuesday episode of the Exchanges at Goldman Sachs podcast.

While Oppenheimer says that many of these characteristics are present in the market today to some degree, he doesn't see the "full level of bubble activity that would suggest that there's anything systemic as a risk building up."


A hallmark of bubbles from the past has been intense speculation, and Oppenheimer says we're not seeing that broadly at the moment. During the dutch tulip mania in the seventeenth century, the price of a tulip bulb cost the same as a luxury townhouse in Amsterdam, he said. In the dotcom bubble, major large cap stocks each increased by 1000% in a single year.

"We're not seeing that scale of price appreciation. We're seeing pockets of it," Oppenheimer said. "And there are a growing number of companies in the stock market that had very high valuations and enterprise value above 20 times, for example... We're seeing a higher proportion of those companies than we've seen since 1999. And that's true in the US and in Europe. But it's not the breadth of this kind of speculation that we're seeing at the moment that would have been typical in the past."


Oppenheimer also said that while stock valuations have risen, a lot of the price appreciation has been a function of historically low interest rates and supportive policy conditions.


One segment of the market that's seen large price appreciation and market concentration is technology stocks. However, Oppenheimer says mega-cap tech names are not reflective of a bubble because, "a bubble really is about the promise of potential growth or the hope of potential growth long into the future. That's certainly what happened during the technology bubble in the late 1990s."

While the technology companies of today have become very large, they're also extremely profitable. They've seen roughly three times the average sales growth of the rest of the market, and roughly twice the average net income growth over the last few years, Oppenheimer said.

He added on mega-cap tech: "...absolutely, they've become very large. That's not unique in periods of significant technological innovation in history. But being large and seeing strong price appreciation is not the equivalent of being a bubble, I think, because these have actually been very profitable parts of the market."

Retail Activity

Another classic characteristic of a stock market bubble is "wide speculative inflows," into assets, particularly from retail investors. Oppenheimer noted that global equities just lodged their largest quarterly inflow on record.

"But again, I think we need to think about the context here. You know, if you look at the last ten years in the US, for example, most investors were actually net sellers of equities. That included, you know, pension funds, insurance companies, and households. In fact, the only net buyer over that whole period was the corporate sector itself. And it was buying back stock. And you know, we do have very strong and large amounts of money still sitting in cash balances so, despite these large outflows of money market funds into equities, in the US there's still around $5 trillion of money sitting on money market funds. And that's about a trillion dollars higher than we saw at the start of 2020," he added.

Oppenheimer concluded that while valuations, particularly in equities, are "very high relative to history," they're partially a function of low interest rates and not yet comparable with other bubble periods. He is however, concerned that the valuations suggest that returns in the future won't be as high as they have been.

"So, I think high valuations are a concern," said the strategist. " It does tell us something about the prospect of longer-term returns, which will likely be lower. But I don't think we have the kind of broad, excessive valuations which would suggest any imminent likelihood of a major collapse in markets. "