The Anatomy of a Bubble

Over the last 18ish months I would say there has been incessant talks of a coming recession and that equity values are out of hand, with the bear camp bringing up their usual arguments using a neverending list of stock multiples and charts to push their fear agenda. How can we ever forget the constant comparisons to the early 2000s where we saw stocks rise to scorching heights only to be crushed down 90%+ afterwards?

And I totally get it.

We've seen stocks multiply over the last few years, and this year's rally off the April Tariff lows almost feels comical, with stocks once again making new all time highs daily and the Nasdaq being +40% from the year lows in just 3 months...

These aren't just random small stocks. These are companies worth hundreds of billions and some even multiple trillions of dollars, with charts that look like unstoppable rocket ships.

Its gotta be a bubble.

No.

Before we get into this weekend's insights piece, diving into the bubble that ISN'T taking place, let's take a look at a week in review at Ataraxia:

Week Return: +4.16% (S&P +1.46%)

Year to Date Return: +31.00% (S&P +8.71%)

Total Return: +159.08% (S&P +67.30%)

We had a solid week, with our top pick, Viant Technologies, $DSP (which we fully highlighted in last week's piece), leading the way.

Other notable wins included:

$HCAT +6.8% and $CRM Calls +16%.

As always all our trade alerts, full analysis and commentary is available in our free group. Let's get back to today's piece.

This chart tells you all you need to know, and I could end the piece here, but let's take a deeper look. The chart shows the forward PE ratio of the Nasdaq 100, which tracks the top 100 technology stocks on the U.S. market.

As you can easily see, the early 200s were simply something else.

However, for much of the 2010s we saw that valuations drifted around 20x forward earnings, and since the pandemic we have traded meaningfully higher than this, with today's metric at just about 27x.

A big argument that comes up in the bear case is that at the rate stocks are exploding right now, we are going to get dangerously near those DotCom bubble levels soon... again, not the case.

Why?

Because this time around, earnings are tangible... and exploding.

Since early 2023, right when AI really started to gain traction across the market, forward EPS results and estimates have absolutely exploded.

Contrary to the late 90s and early 2000s where companies were promising the internet and innovation, we are now seeing companies DELIVERING artificial intelligence.

The best example in the current market is Nvidia, hands down.

Over the last three years we have seen Nvidia's stock go up nearly 1,000%, with the valuation jumping from $500B to $4.3T in that timeframe.

Insanity! Simply has to be a bubble and the valuation is growing way too fast to be explained away.

I present this:

Staggering.

The stock price may have gone up 10x... net income is up nearly 20x.

That is precisely what makes this time different.

Even at the height of the dotcom bubble, despite the 200 P/E, many stocks were either just shell companies promising random tech, or blatantly lying: see MSTR circa 2000. (there were a handful of companies that were legit but still outrageously value).

The big difference now, and while AI is definitely the most disruptive tech since the internet, is that companies are actually growing earnings almost instantly.

The largest names, NVDA, GOOG, MSFT, etc… aren’t just promising AI, their earnings are already growing.

That makes this materially different than 1999. That 27 PE ratio will take an immense time to grow, because as valuations grow, earnings are growing with them just as fast.

Earnings are growing exponentially and stocks will too.

Are there shitcos rallying 1,000%+ mirroring a bubble? Yes. (They always take care of themselves)

Will there be pullbacks? Also yes.

But the reality is, the next decade may just be a repeat of the 1990s or 2010s as innovation explodes and earnings grow, not necessarily 2000.

AI, robotics, space, nuclear… the future is now.

As an investor or trader, the worst thing you can do is underestimate this or try to be contrarian.

Not here, not now.

So we went over the fact that current market risk do not stem from valuations, so where is the single largest source of risk right now?

Macro.

The biggest risks to the market right now are strictly macro economical. Uncertainty surrounding tariffs, the potential resurgence of inflation, and the behavior of the labor market.

(If I was a bear I would click away now)

But even those are bullish!

In the last 4 months we have seen Trump's tariffs successfully negotiating trade deals, something that will help curtail the government's deficit (marginally if at all, but a win in the sense we're past it).

Inflation?

While the full impacts of tariffs are yet to be seen, inflation has faded out of the news cycle, and while not exactly at the Fed's 2% target, it's been hanging around the 2.25-2.75% range for nearly a year now... not notable.

That's why we are now talking rate CUTS over the next few months, something that will simply add fuel to the fire as more money comes into markets and investments in a more favorable environment.

Unemployment is stable as well, but I do see some broad concerns here in the next decade.

With AI taking out lower tier jobs, we are definitely going to see some sort of "labor revolution" one that we haven't really seen since the 1800s during the industrial revolution (I'm very deep into this topic and hope to have a standalone piece on my thoughts on it soon!).

But for now, stable.

So while Macro risks persist, I wouldn't say they are of any real concern, simply at a baseline level of caution, as it would be during any market period.

With that being said, this week is very important. Probably the most important of the year.

We have numerous trade deals going on as I write this, with the EU agreeing to 15% and it's looking like China has once again reached a 90 day extension.

On the earnings front we have massive reports on deck from Meta, Microsoft, Apple and Amazon.

On top of that we have FOMC on Wednesday, paired with GDP, PCE, and unemployment data across the week.

This should bring back some volatility, making for better price action, which has been rather drowsy of late.

Regardless, the long term view remains bullish.

To conclude, I really wanted to get this piece out to show where we at Ataraxia are at in terms of our investing outlook and overall market perspective. We believe the next decade will foster an environment similar to the 1990s and late 2000s and 2010s. One of immense innovation, immense growth and potentially a reshaping of human life itself.

We continue to remain bullish, and I personally believe that we are entering a sort of "Golden Age" in the coming decade. We are going to see technology advance faster than we ever have. We're going to see AI go from rudimentary chatbots in 2023 to being physical manifestations in the form of autonomous vehicles, robots and even have healthcare applications before 2030. Insane.

This is not the time to be risk off and try to be a contrarian. This is the time to embrace innovation and ensure you are doing great research and picking the right stocks to tap into a plethora of returns that will be rewarded to investors in the coming years.

We know we are.

And as always, we would love to have you with us for the journey.

-Andy.