It’s hardly great timing for the 750,000 or so workers in the Republic about to be swept into the State’s new automatic-enrolment pension scheme, as concerns mount that markets are well into bubble territory.
The bears can point to plenty of red flags.
A valuation model developed by Nobel laureate Robert Shiller puts stocks in the S&P 500 as trading at about 40 times earnings, adjusted for inflation – the second-highest level ever, trailing only the dot-com peak in 2000.
As legendary investor Warren Buffett prepares to retire at the end of this year after 60 years leading Berkshire Hathaway, his famed Buffett Indicator, measuring the US market relative to the size of the economy, is hovering around an all-time high.
It might help explain why the firm, as disclosed this week, now has an unprecedented $381 billion (€328 billion)– almost a third of its assets – in cash, rather than stocks and long-term bonds.
The International Monetary Fund, Bank of England, and members of the European Central Bank governing council have warned in the past month about market valuation risks, while the heads of Wall Street beasts Goldman Sachs and Morgan Stanley have predicted that equities could fall 10-20 per cent.
Some believe the correction is long overdue.
Take Michael Burry, the US hedge fund manager who earned more than $800 million (€689 million) for investors by speculating against sub-prime mortgage bonds during the 2008 housing crash – famously chronicled in author Michael Lewis’s book, The Big Short, and its film adaptation.
Burry has given up waiting for bets against some high-flying US tech giants – including artificial intelligence-focused (AI) companies Nvidia and Palantir – to pay off. It emerged this week that he informed investors just before the S&P 500 index hit a record high in late October that he was liquidating his fund.
But there were signs that the trader was waving the white flag when he posted on X on October 31st: “Sometimes, we see bubbles. Sometimes, there is something to do about it. Sometimes, the only winning move is not to play.”
It’s hardly the first time that valuations have become untethered from fundamentals. But at the heart of this one is a tussle between an army of bullish small-time investors and more cautious institutional asset managers.
Retail investors have grown to account for 20-30 per cent of Wall Street trading volumes, according to the Securities Industry and Financial Markets Association. This surge has been fuelled by Millennials and Gen Z embracing commission-free, mobile phone trading and the rise of “meme stocks” that have been going viral on social media and online forums in recent years. The army has become a real market force.
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Bank of America said this week that hedge fund and other institutional clients have been the largest net sellers of individual stocks and exchange-traded funds since the start of 2025, treating the record-breaking rally as an opportunity to take some profits.
However, retail investors have consistently moved in to support the market and “buy the dip” any time there has been a pullback, continuing a trend that’s been evident since 2020, it said.
Many of these have no experience of what it’s like to be invested during a market crash. And they’ve been rewarded handsomely. So far, at least. The S&P 500 is up almost 90 per cent over the past five years. US equities drive global markets – including Dublin. Indeed, they account for more than 60 per cent of the FTSE All-World index, which has advanced 65 per cent over the same period.
However, Bank of America has detected some signs in its investment-flow charts that retail enthusiasm is finally showing signs of waning and that there are early indications of fatigue after the markets’ relentless rise.
JP Morgan analysts noted this week that retail investors are dialling back risky stock bets. This follows a three-year bull run.
A market surge earlier this week, as it became clear that the longest US government shutdown in history was coming to an end, proved short-lived as the White House suggested that inflation and jobs data skipped during the shutdown may never be released.
Expectations that the US Federal Reserve would cut rates in December, usually positive for equities, have fallen sharply due to missing economic data, leaving the Fed flying blind. The odds of a cut next month dropped below 50 per cent on Thursday, according to interest rate traders, down from 96 per cent last month.
Meanwhile, because third-quarter results and guidance from most of the so-called Magnificent Seven tech giants – who have powered much of the S&P 500’s gains – were mixed, Nvidia’s report next week takes on added significance for insight into the direction of the AI trade.
The report from the world’s most valuable company – whose market value has soared a staggering 1,300 per cent to $4.5 trillion over the past five years – could be one of the most significant catalysts for global equity markets for the remainder of the year. With the stock trading at a lofty 53 times earnings estimates for this year, any disappointment could hit the retail investor bulls – and broader market – hard.
It’s hardly an enticing backdrop for the Irish market novices preparing to join the State’s auto-enrolment pension scheme in January. Younger workers, in particular, will be encouraged to put their savings into a plan largely invested in stocks.
Yet the overwhelming evidence from market data remains encouraging. Despite periodic crashes, equities perform well over the long term. The average annual return of the S&P 500 since its inception in 1957 is a little over 10 per cent.
But it’s probably best not to expect that kind of return next year.
