Unpacking the "Everything Bubble": A Frothy Market vs. An Anomalous Moment Deserving of Outlier Valuations
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Introduction
Global markets continue to hover near record highs, supported by abundant liquidity, resilient corporate earnings, and unwavering investor optimism. While investors are happy about the growth in asset prices, beneath the surface lies a growing concern about virtually every major asset class' valuation appearing inflated at the same time. This unusual alignment of valuations across equities, housing, bonds, and private credit has prompted some skeptical economists and investors to call it the “Everything Bubble.” In this week's Calisade Digest and in the Q&A below that sets the stage for it, the Calisade team speaks to how valuations have reached this point and how much substance there is to the "Everything Bubble" moniker.
Q1. Why do people say everything is in a bubble right now?
Across nearly all major asset classes from stocks and bonds to real estate and private credit prices have reached historically high levels. The S&P 500’s forward price-to-earnings ratio sits above 23, compared with a long-term average near 16 to 20 times earnings. U.S. housing prices are roughly 57% higher than they were in 2019, even as mortgage rates hover above 6%. Meanwhile, global debt has surged to $324 trillion, or about 325% of world GDP, reflecting how much leverage supports this expansion.
Some call this the “Everything Bubble” because valuations are elevated almost everywhere, not confined to a single sector as in previous cycles. Yet, unlike many past periods of heady valuations, today’s environment combines liquidity with profitability, while past frothy periods had less substance. Large corporations, especially in technology and energy, are generating record cash flows and impressive growth, justifying these high valuations in the eyes of many investors. However, this equilibrium depends heavily on investment in AI continuing to boom. If demand for AI services were to falter - and thus lead to pullbacks in capital expenditure by the hyperscalers - the effects could ripple across all markets simultaneously.
Q2. Why are stock markets still rising when the economy looks uncertain?
Despite mixed economic signals, stock markets remain strong, largely due to favorable monetary conditions and concentrated earnings power. The Federal Reserve has lowered rates to around 3.75–4.0%, the lowest level in three years, maintaining ample liquidity across the system. Corporate profits, particularly from large-cap technology firms, continue to exceed expectations, with the so-called “Magnificent Seven” now representing nearly 40% of the S&P 500’s total market capitalization.
Investors are forward-looking, betting on productivity gains from artificial intelligence and the likelihood of further rate cuts. Many firms are also benefiting from nominal growth, where inflation lifts revenues even as real growth slows. In essence, markets are being priced on the durability of future earnings rather than current economic softness. As long as nominal GDP growth stays above borrowing costs, valuations can remain elevated a rational response in a world of financial repression and low real yields.
Q3. What role is AI playing in this market boom?
Artificial intelligence has emerged as the defining investment theme of this market cycle. Major technology companies — including Microsoft, Alphabet, Meta, and Amazon plan to spend roughly $320 billion in 2025 on AI infrastructure, with Meta alone projecting around $600 billion through 2028 for data centers and computing capacity. This surge in capital expenditure has boosted demand for semiconductors, power systems, and cloud infrastructure, benefiting companies like Nvidia and Broadcom.
AI has created what many describe as a “Capex Supercycle,” where large firms invest in AI technologies that, in turn, consume their own chips and cloud services. This circular spending fuels near-term growth and market momentum. Yet, much of it remains internally recycled rather than driven by end-user adoption. The long-term sustainability of the AI boom depends on whether these massive investments translate into tangible productivity gains. Until then, the cycle remains powerful but inherently fragile.
Q4. Can too much government debt cause problems for markets?
Global debt levels have reached unprecedented heights, raising questions about sustainability. The U.S. federal debt has surpassed $38 trillion and is projected to reach 120% of GDP by 2035. Worldwide, total debt now stands at approximately $324 trillion — about 325% of global output. Interest payments have become the fastest-growing line item in the U.S. federal budget, limiting the government’s fiscal flexibility during downturns and increasing pressure on bond markets.
Despite these numbers, markets have remained stable due to a long-running policy known as financial repression — where central banks keep real interest rates below inflation, gradually reducing debt burdens over time. While this strategy prevents immediate crises, it distorts asset prices and erodes savers’ purchasing power. As a result, investors are often pushed toward equities and real assets in search of real returns, reinforcing the very dynamics that sustain the current bubble.
Q5. What could happen if this is a bubble and it bursts?
A market correction, if it occurs, may not resemble past collapses but could unfold as a broad repricing across multiple asset classes. Stocks, housing, and private credit could all face simultaneous pressure. The areas most at risk are those fueled by leverage and speculation — such as unprofitable AI startups or opaque private credit structures. Historical patterns suggest equity drawdowns in such cycles can range from 20% to 30%, depending on how liquidity responds.
Central banks would likely act swiftly, deploying rate cuts or expanding balance sheets to stabilize markets. More than a crash, the adjustment could take the form of a rotation as capital moves from overvalued growth sectors toward tangible assets like energy, infrastructure, and gold. For investors with strong balance sheets and stable cash flows, such a shift could even present opportunity rather than crisis.
Conclusion
The term “Everything Bubble” reflects both the strength and the fragility of the current stock market and broader leveraging of global economies. Decades of liquidity, technological ambition, and policy support have built a market where confidence and capital are deeply intertwined. Yet, the same forces that sustain this expansion also heighten its risks. Whether the current cycle endures or corrects will depend on the resilience of corporate earnings, the discipline of monetary policy, and the sustainability of investor optimism. The balance between liquidity and fundamentals will ultimately determine how this extraordinary era unfolds.
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