Herb Stein, the economist with a knack for brevity and blunt truth, once quipped that if something can’t go on forever, it will stop. That simple, undeniable logic hangs heavy over the current state of the US stock market. We’re deep into what looks, smells, and feels like an Artificial Intelligence-induced bubble, and frankly, anyone still doubting that hasn't been paying attention to the hard numbers. The real question isn’t if this thing will eventually burst; it's a matter of how and when.
The data points aren't whispers; they’re air raid sirens. The S&P 500’s Cyclically Adjusted Price Earnings Ratio (CAPE) is hovering around 40. That's more than double its long-run average, putting it in the same rarified air as the dot-com peak in 2000. And if you prefer Warren Buffett’s preferred metric, the stock market’s value relative to GDP has hit an astonishing 230 percent—that's a full 50 percent higher than its previous all-time high, also in 2000. Companies like OpenAI are valued at a staggering $500 billion, despite the fact that they aren't expected to turn a profit for at least a few more years. It feels less like investing and more like speculative fiction.
The concentration risk is equally stark. The so-called Magnificent Seven, those behemoths dominating the AI landscape, now account for a breathtaking 37 percent of the S&P 500’s total value. And let’s not overlook the literally hundreds of billions of dollars being poured into AI, a torrent of capital that has fueled close to half of US GDP growth in recent quarters. This isn't just a sector boom; it’s a gravitational anomaly, pulling everything else into its orbit.
The Conventional Blind Spot
The prevailing narrative, peddled by many—including the likes of Bridgewater founder Billionaire investor Ray Dalio says there's one reason not to sell stocks, even if you're worried about an AI bubble—is that a stock market bubble only truly pops when the Federal Reserve starts to tighten its monetary policy. If that were the sole trigger, you might argue this party could rage on for a good while yet. After all, we've got presidential candidates calling for interest rate cuts (President Trump, for instance, wants three percentage points off), and the expectation is a dovish Fed appointee will replace Jerome Powell when his term wraps up next May. All signs point away from rate hikes in the immediate future.
But here’s where my analysis diverges from the conventional wisdom. I find it genuinely puzzling how often the market discourse fixates on the Fed’s short-term interest rate while seemingly downplaying, if not outright ignoring, the 10-year Treasury bond yield. This long-term yield is, in fact, far more relevant for both the broader economy's performance and, critically, for discounting a company's future earnings stream for valuation purposes. Focusing solely on the Fed’s short-term levers feels like watching only the speedometer while ignoring the fuel gauge and the engine temperature. What if aggressive Fed rate cuts, intended to soothe the market, inadvertently spook the long-term bond market, sending yields spiking? That, in my estimation, is a far more immediate and potent trigger for a market correction than any anticipated Fed tightening.
The Cracks in the Foundation
And that brings us to the precarious state of US public finances. The International Monetary Fund projects the US budget deficit will hover around seven percent of GDP for the foreseeable future. This trajectory puts US public debt at roughly 128 percent of GDP by 2030 (a level, to be precise, greater than that of Greece and Italy today). In this context, an overly accommodative Fed, cutting rates while the government piles on debt, could easily be interpreted by the market as an attempt to "inflate away" the debt problem. That’s a red rag to a bull for the bond vigilantes, those market forces that demand fiscal discipline. Their return would send long-term government bond yields sharply higher, acting like a sudden, severe gravitational pull on equity valuations. The market, in its current state, feels less like a robust engine and more like a high-wire act, where the only thing supporting the performer is the collective belief that they won't fall.
Moreover, the idea that only a Fed tightening can burst a bubble is directly contradicted by recent history. Remember the onset of the COVID-19 pandemic? The S&P 500 plunged 34 percent, and the Fed certainly wasn’t tightening then. Or how about the 12 percent swoon in the S&P 500 in the week following Trump’s April 2, 2025, "liberation day" import tariff announcement? Again, no Fed tightening. Are we so blinded by the "Magnificent Seven's" glow that we forget history's sharp lessons and the myriad ways external shocks can force a reckoning?
Even Dalio, while clinging to his Fed-centric timing, acknowledges other vulnerabilities. He points to the need for investors to liquidate assets—to cover debts, taxes, or liquidity demands. Record margin debt, now at $1.2 trillion, is a flashing warning sign. California’s flirtation with a one-time 5% wealth tax on billionaires could be exactly the kind of political shock that forces mass liquidations, a sudden, forced deleveraging.
The K-shaped recovery isn't helping either. The top 10% of Americans hold nearly 90% of all equities and account for roughly half of all consumer spending. This concentration of wealth creates a brittle market structure. Nvidia's staggering quarterly revenue—$57 billion in Q3, up 62% year-over-year—and its guidance of $65 billion next quarter, while impressive, only reinforce this concentration. It’s a testament to the AI boom, yes, but also a symptom of a market where a few giants carry an outsized weight. Nvidia turns negative after Ray Dalio warns the latest market boom is a ‘big bubble with big wealth gaps’ poised for a politically explosive bust that 'a lot can go up before the bubble bursts,' a statement that carries the weight of both a warning and a concession.
The Inevitable Reckoning
The data is clear: we’re in a bubble. The notion that its demise is solely contingent on the Federal Reserve’s short-term rate decisions is a dangerous oversimplification. History, fiscal realities, and the sheer mechanics of wealth concentration all point to a far more complex and unpredictable set of triggers. Betting the farm on the Fed being the only catalyst is, in my view, a gamble based on incomplete data, and frankly, a poor statistical bet. The question isn't whether the high-wire act ends, but when the wire finally snaps, and from what unforeseen stressor.