Two out of Five Investors Believe S&P 500 Is in Bubble That Will Burst

This week’s Sentiment Survey special question asked AAII members to share their thoughts about the S&P 500 index’s gains this year being driven by a relatively small number of stocks.

Two out of five respondents (40%) say that the S&P 500’s gains reflect an overinflated bubble which will eventually burst. In comparison, 21% of respondents say the S&P 500’s gains reflect disproportionate growth from technology and the so-called FAANG stocks. Many of these respondents also express their concerns that market recovery was not broad based but limited to a relatively small number of stocks.

About 14% of respondents say that balance will eventually be restored, and gains should spread out to more companies. In addition, 10% of respondents say that the bull market is largely the result of the Federal Reserve pumping liquidity into the market and low interest rates. Finally, 9% of respondents say that the market volatility will continue until results from the election roll out.

Here is a sampling of the responses:

• “When recognizing that much of the gain can be attributed to a relatively small number of big stocks, I do have some qualms that it would not take much to send them over the cliff.”
• “There may be a rotation going forward but the weighting of the largest five to 10 S&P 500 names will likely hold returns to a modest level.”
• “The S&P 500 has been held up by the big five tech companies: Facebook, Apple, Netflix, Google (Alphabet) and Microsoft. Since the S&P 500 is market-cap weighted, these mega-cap stocks have an enormous influence on the level of the S&P 500. With so many passive investors investing in the S&P 500, they are passively ensuring that these mega-cap stocks will climb higher in price. This will probably not end well.”
• “We’re seeing the result of the Fed pumping up the economy, followed by institutional money chasing higher gains for selective companies/stocks. Up and down movements for the stock market will continue for the next six to 10 months as the election gets decided and the coronavirus vaccines roll out. Digging out of this is going to take at least two to three years.”
• “The nature of the pandemic created an environment that allowed larger-cap tech companies to thrive.”
• “I believe that large players are gaming the system to push the markets higher and suddenly take capital gains, letting the market fall thereafter until it’s low enough for these same investors to once again buy into the market to drive it higher. It’s a lucrative game they play as they have enough resources to afford the risks undertaken.”

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