Bill Dudley, a Bloomberg Opinion columnist and former president of the Federal Reserve Bank of New York, asserts that the US equity market is currently in bubble territory. He argues that major metrics all point in this direction. While bubbles can persist longer than expected, fueled by sustained investment and profit growth, Dudley emphasizes that the current conditions are unsustainable in the long run.
Key indicators supporting Dudley's bubble warning include the Shiller cyclically adjusted price-to-earnings (CAPE) ratio, which is near 41. This is significantly higher than its 25 to 30-year average of about 17 and approaches the record of 44 set in December 1999. Additionally, the Buffett Indicator, which compares total stock market value to GDP, stands around 240%, well above Warren Buffett's 100% threshold for an overvalued market, indicating a strongly overvalued stock market.
Dudley also highlights concerns about the artificial intelligence (AI) investment cycle, predicting a deceleration in capital expenditure (capex) growth among large cloud providers (hyperscalers) in 2027. This slowdown could squeeze profit margins for the AI sector and its suppliers. He questions whether the industry can generate the estimated $2 trillion in revenue needed to justify current investment levels, noting that excess returns from technological booms historically get competed away as more rivals enter the market.
Adding to market pressure, the 30-year Treasury yield recently surged above 5.3%, its highest since 2007. The Treasury Department responded by doubling its long-bond buyback operations to at least $4 billion per operation for securities in the 10-to-20-year and 20-to-30-year maturity sectors, effective September 9 through November 4. This move, aimed at improving liquidity, comes as the total federal debt crosses $40 trillion. Dudley suggests that this fiscal backdrop complicates the Federal Reserve's task. The coming months will reveal if a slowdown in AI capex growth occurs rapidly enough to prevent a more severe market correction.
