Bubble fears grow, but market fundamentals tell a different story

The performance of the stock market, and particularly the artificial intelligence (AI)-driven hyperscalers and chip stocks, has sparked renewed debate over whether we are in a market bubble. In general, while we have seen some parabolic moves in some stocks that are clearly not sustainable, there are enough differences in the market today to dissuade us from saying we are in a bubble. The most common comparison is to the tech bubble of the late 1990s, and as compared to that period, corporate profitability is much higher, meaning market multiples are significantly lower. In fact, market multiples have declined over the course of 2026 as earnings increases have outpaced stock price increases. We would expect rates of return to slow from recent levels, but we remain optimistic on growth and earnings going into next year.

Our chart this week looks at returns in a bit different way by comparing the rate of return for stocks over bonds over ten-year rolling periods. Doing this allows us to see trends over a longer period and away from the day-to-day, or even month-to-month, noise of the markets. Looking at asset class level returns in this manner also provides a perspective on what we might need to consider on something longer than the next six-to-12-month time frame. As we do this, we can see that stocks have recently outperformed bonds over the last rolling ten-year period at a rate that is well above the average and near levels that have often marked important turning points.

Because the chart goes back to 1900 we can see the impact of the "Roaring Twenties" and the material shift in the years following the crash of 1929. We also see the biggest period of outperformance was during the "Nifty Fifty" period as the market became convinced there were "buy them and forget them" stocks representing what, at the time, were the greatest companies in the world. The crash of 1987 is there and yes, we see the tech bubble of 2000, a period many of us recall. At that time, I was running a small, fixed income product which we offered to our primarily equity-oriented investors. As the tech bubble aged, the Fed was raising rates and the ten-year Treasury note approached a 7% yield. I distinctly remember a conversation when I was pointing out the attractiveness of a 7% return to a client when they asked, "Steve, why would I buy a 7% ten-year Treasury when I can make 7% in a day in the stock market?" In the short run, they were absolutely correct. Over the next ten years, however? Well, let's just say their perception changed a bit.

At present, the Fed is raising rates, the ten-year Treasury is at 5.25%, the highest since 2007, and total returns for the broad Bloomberg Aggregate Index are negative for the last five years. Timing when the trend between stock and bond returns is difficult and it feels like the path of least resistance in rates is higher. Nevertheless, nothing lasts forever and that includes the outperformance stocks over bonds for significant periods of time.

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