Why Global Stocks Are Not Yet in a Bubble

The global equities market has some characteristics of an early-stage bubble, such as valuation excess, concentration, and investor exuberance. But Goldman Sachs Research sees key differences with past bubbles.

While investor enthusiasm about artificial intelligence (AI) has been driving up valuations for technology companies, those metrics are based on strong fundamentals rather than speculation. AI is a source of investors’ exuberance, but the sector is led by established firms rather than an array of poorly capitalized startups.

“The appreciation of the technology sector has, so far, been driven by fundamental growth rather than irrational speculation about future growth,” writes Peter Oppenheimer, Goldman Sachs Research’s chief global equity strategist. While valuations of the technology sector are becoming stretched, they’re “not yet at levels consistent with historical bubbles,” he writes.

In other words, while recent gains in global equities and surging technology stocks invite comparisons to infamous financial bubbles, such as the dot-com mania and Japan’s asset price bubble in the late 1980s, several classic signs of an unsustainable bubble are missing.

What are the signs of an asset bubble?

History shows that bubbles typically arise around transformative innovation that attracts investor and corporate enthusiasm. In turn, that drives up asset prices and capacity expansion far ahead of fundamentals. Examples range from the UK’s Canal Mania in the 18th century to recent internet and real estate bubbles. These were marked by rapid price appreciation detached from actual corporate earnings, widespread speculation, and overleveraged financial risks.

At the moment, market leadership is highly concentrated: The top 10 US companies account for almost a quarter of the global equity market, and eight of those companies are in the technology sector. This level of concentration is unusual and poses risks, but it is not unique to technology. Past cycles have seen the finance, transport, or energy sector become dominant for decades without always ending in crisis.

The market for initial public offerings and acquisitions is heating up, and IPO premiums have reached levels unseen since the dot-com mania bubble. 

“Signs of excess are starting to emerge,” Oppenheimer writes. He points out that IPO and M&A [mergers & acquisitions] activity is accelerating and the starting-day premiums for new issues (the return generated between a stock’s offering price and its closing price on the first day of trading) have reached an average of 30% in the US, the highest since the technology bubble in the late 1990s.

While this has encouraged speculation, it is still far short of the hundreds of speculative IPOs and secondary offerings that funded the rapid expansion at the turn of the century. In fact, most recent tech investment is driven by disciplined capital spending from established companies, most of whom finance projects internally rather than resorting to risky leverage.

Our researchers caution that markets remain vulnerable to disappointing corporate earnings or a loss of confidence, which could trigger sharp corrections.

The risk of over-investment by dominant tech companies, for example, is real. Surging capital expenditure, especially in AI and data centers, may not generate proportional returns and could expose investors to correction risk.

While capex-to-sales ratios have risen, they remain below historic bubble levels, and leverage is contained. Most spending is funded by internal cash flow, not debt, and the level of capex spending relative to free cash flow is significantly below levels experienced in the late 1990s.

Is bond issuance by tech firms a sign of a market bubble?

Recent increases in bond issuance among big tech firms merit attention, but overall financial health is robust, limiting broader economic exposure. Moreover, strong bank and private sector balance sheets reduce the likelihood that a sharp tech correction would snowball into system-wide risk.

A key difference in the current cycle is the broadening of stock market returns beyond US large-cap technology companies. European markets, value sectors, and emerging cyclical industries have begun to outperform, presenting investors with more opportunities to diversify than they had in previous tech-dominated rallies.

In addition, AI is increasingly tied to physical infrastructure—energy, resources, capital goods—linking tech sector fortunes more closely with the broader economy.

How should investors adjust their portfolios?

Given these dynamics, investors should focus on diversification, monitoring capex and leverage, and avoiding overpaying for unproven companies, according to Goldman Sachs Research. Investors may find opportunities by monitoring in the following ways:

• Broadening exposure across regions and sectors to reduce reliance on US tech
• Tracking earnings momentum and capex discipline among leading companies, and preparing for possible volatility if growth expectations falter
• Identifying new entrants in the technology and AI space, but demanding evidence of scalable, sustainable business models
• Considering benefits for adjacent sectors—physical infrastructure, resources, and capital goods—that will be crucial to supporting AI’s advance
• Remaining alert to shifts toward debt financing in big tech, as rising leverage could introduce vulnerabilities over time.

Although equity markets have some of the features associated with bubbles, Goldman Sachs Research finds that most evidence points to strong underlying fundamentals rather than runaway speculation. Investors are facing heightened risk, but diversification and disciplined monitoring are the best defenses against future uncertainty.

“On balance, valuations are looking increasingly stretched but not yet at the levels that were typical in other bubble periods before they burst,” Oppenheimer writes. “The biggest risk is that earnings disappoint and investors start to question the sustainability of their current rates of return.”

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