Is the US Stock Market Bubble Bursting?

GMO

Martin Tarlie

Research

8 Pages

GMO introduces a quantitative Bubble Model to assess whether recent U.S. equity behavior reflects a true speculative bubble. It argues the 2017–2018 rally met bubble conditions, and notably, the S&P 500 fell nearly 14% in Q4 2018 despite strong earnings growth, pointing to sentiment, not fundamentals, as the key driver.

Key Takeaways

Sentiment Drives Bubbles: Model shows bubbles form when improving fundamentals and rising expectations reinforce each other, but reverse when sentiment shifts, as seen with a 4% drop in 2019 EPS estimates.
Strong Fundamentals Mislead: Earnings rose 28% in 2018 to about $140, yet markets declined sharply, highlighting that price moves can diverge materially from underlying economic strength.
Deflation Already Started: Bubble conditions persisted from early 2017 to Q3 2018, with deflation beginning in Q4 as the S&P 500 dropped nearly 14% during that period.
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