Stock markets defy every crisis, just as they did before the dot-com crash

What on earth is going on in the stock markets? After the tariff hammer-blow in April last year, the legendary banker Oswald Grübel let it be known through the media that he was parking most of his money in cash and that the time to buy shares had not yet come. Since then, the stock markets have climbed to one high after another.

It is as though they have lost all sense of gravity. Neither the wars in Ukraine and Iran, nor US President Donald Trump's erratic tariff policy, nor rising inflation and interest rates can shake the markets for long. Interim corrections give way to powerful rallies within a few days or weeks.

The performance of the American technology exchange Nasdaq 100 has been particularly impressive, driven by the hype around artificial intelligence (AI). With a breathtaking return of around 26% a year, the index has roughly quadrupled in just over six years.

Equity valuations now stand at a level last seen before the dot-com bubble burst. Measured by the Shiller PE, the US stock market is currently valued at around 40 times earnings (S&P 500) to 60 times (Nasdaq). At the turn of the millennium, the S&P 500 corrected by 40%, while the Nasdaq technology exchange slumped by as much as 80% – after which the index had to quintuple to recoup the losses. Are we, much as we were back then, on the brink of a market collapse?

One sign that points to a bubble is how euphorically investors are behaving. They are no longer content with the 7 to 9% annual return that shares yield over the long term. And who can blame investors, when shares in growth-driven companies such as ASML, Intel or Nvidia deliver a double-digit return within days or weeks?

The stock market rally is driven almost exclusively by shares in the technology and information sector, centred on AI. ‘Benchmark huggers’, who invest close to the index, are currently profiting from the overheated US stock market, which carries a weighting of well over 60% in the MSCI World index and is heavily driven by information technology. According to estimates, a small number of companies that benefit from developments in the field of AI now account for close to 50% of the US stock market.

The action right now is with the AI giants, not with ‘boring’ corporations such as Coca-Cola, Nestlé, Procter & Gamble or Siemens, which generate steady profits and pay out attractive dividends. Value-oriented investors such as the Oracle of Omaha, Warren Buffett, are having a lean time of it in this gold-rush era. It is telling that, within a single year, his Berkshire Hathaway has been forced to report underperformance against the S&P 500 of more than 30 per cent.

With the flotations of the space and AI companies SpaceX, Anthropic and OpenAI, the tech euphoria may be reaching its peak. Their fabulous valuations rest in large part on revenue earned circularly among themselves. Under a fast-track procedure, the three companies are to be admitted to the major indices – a regulatory scandal, all the more so since swathes of passive investors are being pushed pro-cyclically into concentration risks. Experts are already warning of a passive investment bubble.

On its market debut, Elon Musk’s SpaceX reached an astronomical market capitalisation of over $2 trillion. Last year, the company generated a mere $19 billion in revenue and posted a loss of $5 billion. Whether Musk’s gigantic ambitions as a space visionary will ultimately come good is, quite literally, written in the stars.

Experience tells us that euphoric investors react with panic almost overnight once market sentiment turns. Another sign of overheating is the alarming degree of AI-washing. Every company that wants a higher market valuation laces its business model with AI fantasy. The parallels with the dot-com bubble of the turn of the millennium are impossible to miss.

But things may turn out quite differently, and the rally may continue. The tailwind could come, of all things, from a worrying geopolitical development that one would expect to have the opposite effect: the world’s spiralling government debt.

It is true that interest rates in the United States, Great Britain and Japan are at their highest in around fifteen years, yet it is becoming increasingly clear that political pressure on the world’s leading central banks – the US, Japan and Europe – to cut interest rates will mount, in order to ease public finances and avoid a sovereign default.

The magic phrase will be financial repression. Under it, interest rates are held significantly below the rate of inflation. Japan has been showing the way for many years: it is saddled with horrendous debt of 235% of gross domestic product, and at 0.75% its key interest rate is a hefty 2.5 per cent below average inflation for 2025, which came in at around 3.2%.

The Bank of Japan abandoned its independence from politics long ago. As a result of Japan’s financial repression, speculative hedge funds are using cheap yen loans and so-called carry trades to bet on a dramatic devaluation of the Japanese currency, whose historic undervaluation in turn fuels share prices.

In the US, where inflation has been at a similarly high level to Japan’s, the key interest rate is a markedly higher 3.75% – to the annoyance of the American president. It remains to be seen whether the new head of the central bank, Kevin Warsh, can resist Trump’s pressure to cut rates.