Howard reminds us that in the early 2000s, investors experienced two major bubbles: the TMT (tech-media-telecom) bubble and the subprime real estate bubble. The dotcom bubble burst in the early 2000s, followed by the subprime bubble, which led to risky lending and massive losses. These events made investors wary of potential bubbles.

Today, many wonder whether the S&P 500 is in a bubble, especially with the "Magnificent Seven": Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla. These seven giants dominate the S&P 500, accounting for around 32-33% of its capitalization, double that of five years ago. This is a level not seen since the TMT bubble of 2000. What's more, U.S. equities account for over 70% of the MSCI World Index, a record since 1970. In his Citi. At the time, the bank invested heavily in the "Nifty Fifty", a group of shares in large, high-growth American companies. These companies were perceived as infallible, and their shares were bought at exorbitant prices.

There were three reasons for this craze: post-war economic growth, innovation in key sectors, and the emergence of "growth stocks". However, the bubble burst, and those who invested in Nifty Fifty lost over 90% of their capital in five years. The market halved in 1973-74, revealing that the shares were overvalued. This experience taught Marks that the price paid is crucial, and that no asset is immune to overvaluation.

Howard Marks has lived through several financial bubbles, often caused by misunderstood or overvalued innovations. New technologies are easy to attract, but their shortcomings become apparent in times of crisis. Even innovative companies can be overtaken by competitors or newer technologies. In the 90s, innovation exploded, and with it, enthusiasm for the Internet. Internet-related stocks reached record highs, but many lost their value after the bubble burst. Investors often overestimate the potential of new companies, leading to excessive valuations. Without a track record, valuations are based on speculation. Investors sometimes adopt a "lottery ticket mentality", betting on the unlikely success of start-ups. This fuels speculative bubbles, where optimism outweighs caution.

Historically, the S&P 500 has traded at around 16 times annual earnings, compared with 30 times current earnings. In times of bubble, stocks can sell well above this multiple, like the Nifty Fifty in the 60s. Today, S&P 500 leaders like Nvidia trade at high multiples, but not as extreme, especially given their exceptional fundamentals.

However, we must not forget the cyclical nature of some of these companies. Despite the spectacular rise in Nvidia 's EPS (earnings per share) between 2023 and 2024 - from USD 0.17 to USD 1.19 - the company remains a cyclical stock (despite its growing software business). Its drawdowns in recent years (-56% in 2018, -66% in 2022) bear witness to this.

It appears that investors are betting on the longevity and continued growth of these companies, despite the risks associated with technological innovation and competition. However, many former market stars have disappeared from the S&P 500, often due to mergers rather than bankruptcies.

Howard M. observes that, during bubbles, investors treat leading companies as if they were going to dominate indefinitely, which is not always the case. Bubbles often arise from technological or financial innovations, and can extend to entire markets. In the 1990s, the S&P 500 benefited from falling interest rates and enthusiasm for equities, with an average annual return of over 20%. However, this euphoria led to an overvaluation of equities, followed by a fall in the S&P 500 between 2000 and 2002.

Source : MarketScreener

Recently, the S&P 500 has followed two years of strong gains (+24.23% in 2023 and +23.31% in 2024). According to him, current signs include persistent optimism, high valuations, and a craze for AI.

Marks presented a JP Morgan chart showing the relationship between the S&P 500's price/earnings ratio and returns over ten years, from 1988 to 2014. He noted that higher initial valuations generally lead to lower returns. Currently, the price/earnings ratio is in the top decile, which could indicate modest future returns, between +2% and -2%.

Source: JP Morgan

Several major banks have forecast similar returns, such as Goldman Sachs, which predicts annualized returns of 3% for the next decade.

Proof that the price paid for an investment, even a long-term one, is important. If future growth disappoints, both valuation multiples and earnings forecasts could correct at the same time, resulting in a sharp decline and heightened volatility. The market may just as well go sideways for a while, while it absorbs this demanding valuation. Time will tell whether current valuations are justified, but the odds are on the side of caution.