Stocks' record highs don't indicate a bubble.

AI-driven stock gains over the past year have fueled concerns about a market bubble. Wall Street strategists say no for now. Many think comparing the market rise to the early 2000s dot-com bubble or 2021 meme stock hysteria is premature. The present rise isn't as absurd as those during prior bubbles' late phases.

The past three years have seen stocks rise 31%. This is consistent with three-year average returns and well behind the 98% return at the start of 2000 and the 90% return by the end of 2021. "We are not yet close to those levels, even as the market sits at all-time highs," Baird investment strategy analyst Ross Mayfield informed clients Monday night. "There’s room to run."The rally's dynamics don't reflect market excitement like earlier bubbles.

Goldman Sachs calculated the fraction of US stocks with high valuations using an enterprise value-to-sales ratio. Highly valued stocks make up 24% of the US equity market, down from 28% in 2021 and 35% during the late 1990s tech bubble. Significantly, fewer overvalued corporations are contributing to this run.

If we look at the number of companies trading at very elevated multiples, that looks even less extreme relative to history," said Goldman Sachs equities analyst Ben Snider to Yahoo Finance. "So effectively, as we all know, there are a small number today of very large companies trading at elevated multiples, rather than what we saw in 2021, just a couple years ago, where there seemed to be widespread euphoria priced across the market."

He said the rally's narrowness mimics the dot-com bubble. Snider feels the key difference this time is that many large-cap tech stocks have risen with earnings growth. Market darlings like Nortel Networks in the dot-com bubble were different, argues Snider. Over the past year, AI leader Nvidia's (NVDA) stock has risen 255%. Earnings climbed 288% in the prior fiscal year, which the company reported in late February.

For instance, Nortel stock soared almost 320% in 1999. Bloomberg statistics showed adjusted EPS growth of 94% that year. Nortel declared bankruptcy and is no longer publicly traded.

Our view is that this is not a bubble and the simplest explanation is that prices and the valuations of these megacap stocks, whether you're calling them the Mag Seven or others, have really been driven by a combination of superior growth and strong balance sheets, and both of those qualities historically have warranted premium valuations," Snider.

John Higgins of Capital Economics believes the market is in a bubble, but only in its early stages. Higgins emphasized that margin debt, or investors' borrowing to buy stocks, has not increased alongside equities' rise. This happened during the dot-com bubble and the 2021 rise, and it typically means the bubble might "end in tears" as leverage is quickly unwound by a market decline and forced selling.

"The conclusion to draw simply from that alone would be we're not in the late stages of a bubble, at least not based on the way that rising margin debt has typically accompanied the next stages of prior bubbles," said Higgins.

According to Higgins, the S&P 500 (^GSPC) will hit 6,500 by 2025 as tech valuations approach dot-com bubble heights. Higgins emphasizes that even that is an estimate based on how far investors stretched the bubble in the early 2000s. This time may be different.

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