At any point in time in the market, there will be bullish and bearish views. During certain times, bullish views dominate; at some other times, bearish views may dominate. It is normal that after a bull run, with valuations reaching elevated levels, bearish views emerge and become topics of heated discussion and debate. Most investors don’t give much importance to bearish views during normal times. But when respected names signal warning, that is taken seriously. Recently, market action by Warren Buffet, an article by Gita Gopinath and a comment by Sundar Pichai became topics of serious discussion in market circles. Let’s look at the perspectives of these respected voices and try to decipher their implications.
For perspective: the US market has been on a roll this year with the S&P 500 and Nasdaq setting several new records. Fears are being expressed about a possible market crash. A recent Bank of America survey indicated that 45 percent of global fund managers believed that the biggest risk to global markets is a bubble in AI stocks. The market actions of Warren Buffet, the article by Gita Gopinath, and the remark by Sundar Pichai have to be seen in this context.
Warren Buffet has been increasing his cash position since May 2024. Now, Buffet and his company Berkshire Hathaway have a cash position (cash and investment in US short-term treasuries) of an incredible $380 billion. Buffet attaches a lot of importance to valuation. From his perspective, it can be argued that S&P 500’s forward PE of 22 is much higher than the long-term average of around 15. According to Buffet, the market cap to GDP ratio, the so-called Buffet ratio, is hugely significant. Regarding the market cap to GDP ratio, he had famously said, “anything approaching 200 is playing with fire.” Now, this ratio in the US is around 220. No wonder, Buffet has increased the cash position. It is also important to note that S&P 500 has appreciated by around 30 percent, after Buffet started increasing his cash position. In other words, the great guru, who has an enviable track record of consistently outperforming the S&P 500 for decades, has underperformed the market by 30 percent. Even Homer nods. It would be better to look at Berkshire Hathaway’s cash position as a sign of readiness to invest when the opportunity arises, rather than as a reflection of fear. Or the intention may be to give a clean slate to his successor, Greg Abel.
Gita Gopinath, the former chief economist at the IMF, wrote an article in The Economist, expressing concerns over the possibility of a bubble and its consequences for the world. According to Gita Gopinath, at the heart of the concern is the huge global exposure to US equities. She fears that a sharp downturn in US stock markets would reverberate across the world. While appreciating the potential of AI to increase productivity, Gita Gopinath warns, “AI boom is real; so are the risks.”
Close on the heels of Gita Gopinath’s article came Google CEO Sundar Pichai’s comment about “elements of irrationality in the booming market”. While acknowledging that the growth of AI investment marks “an extraordinary moment”, Sundar Pichai felt uncomfortable about the irrational element in the market boom.
These red flags raised by the respected leaders are not signals of an imminent crisis, but warnings of potential dangers that may emerge from irrational exuberance.
