From Morningstar: 2024-10-31 05:21:24

Market bubbles can be identified by looking for areas where people are having the most fun and experiencing euphoria. High P/E ratios often precede market downturns, with the five most euphoric periods in history leading to the worst economic outcomes. This paradox highlights the market’s predictive power being the opposite of what is traditionally taught.

The explosion of AI in the market is different from previous bubbles. Two distinct events occurred in 2022 and 2023, with AI companies experiencing significant growth and attracting investor attention. The market bounced back after a major downturn in 2022, with AI stocks leading the way in a unique and unprecedented development.

AI companies are compared to late ’90s internet bubble companies, with AI companies being seen as higher quality due to their monopoly characteristics. Quality is defined by high stable returns, often achieved through monopolies or defensive moats. Government intervention is crucial in regulating these monopolies to prevent excessive power and control over the market.



Read more at Morningstar: How to Spot a Market Bubble