Markets look like they are in a bubble. What are investors doing now?

For many, valuations look stretched as they hover at levels similar to the high flying days of 2000. That said, high valuations alone don’t necessarily mean the rally is about to end, investors say. History has shown that markets have often been able to climb for much longer than thought possible, whether it was the Internet boom in the late 1990s or the dizzying boom in Japanese stocks in the 1980s.

And recently, the broader stock market has been on the decline. The S&P 500 fell 3.3% last week, but remains 66% higher than its March low. The bubble-like behavior is usually limited to a handful of individual stocks there, not larger indexes.

An even bigger problem arguing against a market-wide bubble is simple math. With interest rates low and further stimulus measures on the table, many investors are being richly rewarded by putting their money into riskier, higher-yielding assets. In addition, in many cases, revenues have been sustained or robust despite a global pandemic.

This combination of factors has fueled investor optimism. According to a recent Bank of America survey of 194 money managers overseeing $ 561 billion in assets, bullishness about stocks among money managers is at a three-year high. Meanwhile, the average share of cash in portfolios – usually a shield against market turmoil – is at its lowest level since May 2013.

Nevertheless, investors are trying to determine what could create bubbles between individual stocks and whether any of the bursts will spread to the wider market. Next week, investors will get a look at new data on the manufacturing sector, Amazon.com Inc.’s earnings..

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and Google parent company Alphabet Inc.

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and the January employment report.

“You know, this one ticked all the boxes in a history book,” said Jeremy Grantham, co-founder of Boston Money Manager Grantham, Mayo, Van Otterloo & Co., who predicted the market crashes of 2000 and 2008. Grantham calls the current market overheated since last year.

But even he admits that the timing of a market summit is difficult.

“We know that each bubble is a little bit different, and with the help of new trading platforms and the Internet it could set more records,” he said.

Mr. Grantham isn’t alone. According to a recent study by Deutsche Bank, nearly 90% of the approximately 627 market professionals think some financial markets are in a bubble. Meanwhile, Google searches for the term ‘stock market bubble’ hit an all-time high in January.

Jerry Braakman, chief investment officer of First American Trust, says his company, concerned about overvaluation in the US, has gradually shifted more money to stocks elsewhere.

Lately, “the market has not been correlated with the macro picture,” he said.

While the movements of some stocks and assets have been shocking, analysts and investors say they are not surprised by the freewheeling, speculative activity in the financial markets.

A super accommodative Federal Reserve, low interest rates and, more recently, optimism about the coronavirus vaccine and the economy have supported much of investor purchases over the past 11 months. Many Americans built up their savings during the pandemic – and will gain even more if Congress continues with another stimulus package. And the prospect of low returns on most other assets has prompted investors to buy stocks more aggressively.

Add to that, there are more individual investors trading than ever before. Those investors threw their weight last year by shocking Wall Street veterans with a wave of irrational stock selections, including Hertz Global Holdings Inc.,

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which spiked nearly 900% from low to high in the wake of the bankruptcy protection filing.

This year’s encores were even more astonishing. On Wednesday alone, 24.5 billion shares and 57.1 million option contracts changed hands, a record pushed by individual investors, according to Rich Repetto, a director of Piper Sandler & Co. video game store has made a profit of more than 1,700% since the beginning of the year.

“This is just one example of what will become dozens,” said Mr Grantham. Other retail darlings include AMC, which jumped more than 300% Wednesday, and BlackBerry Ltd.

, whose same-day stock posted its greatest profit in more than 17 years.

Companies are rushing to act.

Companies have raised $ 13.4 billion so far through 24 IPOs this year, a 300% increase in the number of listings in the same period last year, according to data from Renaissance Capital. Blank check companies continued to flood the market, with 91 raising about $ 25 billion, nearly a third of the value raised year-round, according to SPACinsider.com. And there are 111 additional stock offers by US listed companies, doubling the number from the same period a year earlier, data from Dealogic shows.

Usually such frenzied activity would cause major money managers to withdraw from stocks. But many argue that GameStop, AMC and other high-flying stocks represent their own bubbles – and don’t pose a threat to the entire financial ecosystem. Analysts at Goldman Sachs Group Inc.

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say the emergence of unprofitable stocks, which they say account for about 5% of the total market, poses little risk of contagion.

“These stocks don’t make up the bulk of the stock market,” said Samantha McLemore, portfolio manager at Miller Value Partners, a $ 3.5 billion asset manager. “There are so many parts of the market that we find attractively valued.”

On the face of it, investors’ choice of measuring valuations and price-earnings ratios suggests that the market looks expensive.

The S&P 500 is currently trading at 22 times its expected earnings in the next 12 months, not far from the 25 times the index it traded in 2000, just before the dot-com crash, according to FactSet.

But that’s only part of the picture. That level seems less of a concern if the low interest rates and earnings that are expected to rise are included, according to several investors and analysts.

A simple explanation of why investors have stopped withdrawing?

“We’ve seen it in the past – if you think you have a bubble and are selling too quickly, that can be a very costly transaction,” said First American Trust’s Mr. Braakman.

Write to Michael Wursthorn at [email protected] and Akane Otani at [email protected]