Playing With Bubbles
BY JAMES H. DRYDEN | September 2025
There’s been much discussion in the financial media lately about asset bubbles – that condition where the price of an asset, whether stocks, real estate, or commodities, rises far above its intrinsic value, largely driven by speculation and excessive enthusiasm. History is loaded with examples – tulip bulbs in 1630s Netherlands, the dot.com stocks of the late 1990s, and the U.S. housing market in the mid-2000s all soared before ultimately collapsing. Often, it isn’t the boom we remember the most – it’s the fallout that follows. The NASDAQ fell roughly 80% between 2000 and 20021 and the housing bubble triggered the Global Financial Crisis of 2007-2009, showing how quickly markets can reverse when prices meaningfully disconnect from fundamentals.
Fast forward to today. The S&P 500 has already closed at 20 all-time highs through the end of August1 and the forward price-to-earnings ratio for the Magnificent Seven stocks sits at a median of 26.82 – lofty by any measure. Earlier this summer, analysts expressed concern about a potential “melt-up” in the financial markets, and more recently, those concerns have shifted toward a bubble reminiscent of the dot.com era. While some caution is warranted, the situation is nuanced – investors are aware they may be playing with bubbles, but the risks are not identical to past extremes.
Howard Marks, the highly respected founder and Chairman of Oaktree Capital Management, offers some perspective. In January 2000, he warned that stocks were overvalued, an outlook that proved prescient at the time. Yet, in a memo to clients just last month, he noted that “the Magnificent Seven p/e ratio is certainly above average, but I don’t find it unreasonable when viewed against what I believe to be the companies’ exceptional products, significant market shares, high incremental profit margins, and strong competitive moats.” In other words, he believes this time may be different. Markets often climb “walls of worry”, and even though valuations may appear extended, that fact alone is not a sufficient reason for alarm.
Our attention instead is focused on the Federal Reserve and the stimulative potential of future interest rate cuts on the economy, and ultimately, asset prices. It seems a foregone conclusion that the Fed will lower interest rates during their September 17th FOMC meeting; in fact, the CME FedWatch tool currently implies an 86.4% probability of a quarter-point cut. But does the economy really need stimulating? Recent data suggest is does not. Consider:
- Personal Income and Consumer Spending both showed robust gains in July3
- Core Inflation increased 2.9% year-over-year in July, rising steadily for the past four months3
- The Atlanta Fed GDPNow model is tracking third quarter GDP growth at +3.5%, an acceleration from Q2’s +3.3%3
Our point is, cutting interest rates in an already-healthy economy could overheat growth, accelerate inflation, and inflate asset values further, ultimately resulting in a bad ending, especially with many asset values already elevated. Something to watch carefully as we navigate the weeks ahead.
And if that’s not enough, perhaps market seasonality will suggest we keep both hands on the wheel. September has a long history of being the only month of the year with a persistently negative average return for the S&P 5004. Even amid new highs, it’s a reminder that patience, discipline, and careful assessment of risk remain essential. Ultimately, while we remain bullish and believe markets may continue their climb, we want to respect the risks, never chase extremes, and always maintain a steady course – because bubbles are easier to spot in hindsight.
As always, there’s more to come.
1 S&P Global
2 Reuters
3 Yardeni Research
4 Reuters
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. The S&P 500 Index is a capitalization-weighted index calculated on a total return basis with dividends reinvested. The index includes 500 widely held U.S. market industrial, utility, transportation, and financial companies.
PM – 03092027-8369575.1.1
The performance is past performance, which is not a guarantee of future results. Current performance may be lower or higher than the performance quoted.