The U.S. stock market is not in a bubble, according to Ray Dalio, the former co-chief investment officer of Bridgewater Associates, the largest hedge fund. Despite the market's recent significant rallies, Dalio's analysis suggests that the market is not exhibiting typical bubble characteristics.
What Happened: In a comprehensive analysis shared on LinkedIn, Dalio detailed the indicators he uses to spot market bubbles. These include high prices compared to traditional value measures, unsustainable conditions, an influx of new and inexperienced buyers, widespread bullish sentiment, a high percentage of purchases financed by debt, and a significant amount of forward and speculative purchases.
Dalio's application of these criteria to the U.S. stock market led him to conclude that the market is not in a bubble. He noted that the market, on the whole, is in the mid-range (52nd percentile) and does not align with previous bubbles.
Dalio also discussed the "Magnificent 7" group of companies that have contributed significantly to U.S. stock market gains over the past year.
"The Mag-7 is measured to be a bit frothy but not in a full-on bubble," he said. He noted that valuations are slightly high, given current and projected earnings, but he does not see excessive leverage or a surge of "new and naive buyers."
However, Dalio noted that a significant correction could still occur, particularly if generative AI does not live up to the priced-in impact.
Why It Matters: Dalio's analysis comes amid ongoing debates about the state of the U.S. stock market. In February, Capital Economics' John Higgins predicted that the current stock market bubble would continue to inflate until the end of 2025, driven by the narrative around artificial intelligence.
However, the "Magnificent 7", which Dalio mentioned, has seen its fortunes diverge this year, according to Mike O'Rourke, the chief market strategist at Jones Trading, suggesting that the group's dominance over the stock market is waning.
On a related note, Ark Invest's Chief Futurist Brett Winton this week predicted that real GDP growth could reach 7% annually on average in the current business cycle, surpassing the rate seen in any year since 1950, thanks to the impact of transformative technologies.
On Thursday, the SPDR S&P 500 ETF Trust (NYSE:SPY) closed up 0.36% at $506.76, the SPDR Dow Jones Industrial Average (NYSE:DIA) rose marginally to $389.95 and the tech-heavy Invesco QQQ Trust (NASDAQ:QQQ) rose 0.86% to $439, according to Benzinga Pro data. The three ETFs are up 7.5%, 3.4%, and 9%, respectively, so far this year.