News & Insights

Be Heartened by the Bubble Worriers  

Headlines and stories on internet bubbles have triggered a pause in this year’s bull market run. From Federal Reserve Chairman Jerome Powell’s careful “fairly highly valued” stock prices to Ken Griffin’s “echoes of the dot-com bubble,” and the outcries from the likes of Jamie Dimon and the Bank of England’s Andrew Bailey, worriers have captured the news cycle. The focus has been on artificial intelligence (AI) stocks, which have driven much of the market’s run-up and triggered the bubble fears.

Empirical evidence shows future stock returns are inversely correlated with sentiment. When markets are driven by euphoria, returns tend to underperform. When sentiments are gloomy, outperformance is more likely. Most indicators show a neutral level of sentiment.  While retail and leveraged hedge funds have elevated equity allocations, surveys of global institutional fund managers show a more measured outlook, with sentiment up from tariff Liberation Day lows, but still below post-2024 election peaks. Goldman has one of the best sentiment indicators, aggregating inputs across investor types, which shows them now leaning bearish.

Allocations among institutional managers tell a similar story, with emerging market bullishness skewing equity positioning above historical averages. Allocations to U.S. equities are currently underweight.

According to the Bank of America Global Fund Manager Survey, institutional investors view the Magnificent Seven tech stocks as the most crowded trade, and AI as the biggest tail risk. Despite over 50% of investors believing we are in an AI bubble, bullish investors may take comfort in Ken Fisher’s well-known maxim: “The more people say something is a bubble, the more you know it isn’t. In a real bubble, there’s almost never any talk about it until after it bursts.” Howard Marks famously quipped that bull markets “climb a wall of worry.” The market’s anxiety may, paradoxically, be a sign of health.

U.S. Equity Market Sentiment Indicator

Source: Goldman Sachs Research

Net% of FMS Investors Overweight US Equities 

Source: BofA Global Manager Survey, Datastream

No Sign of Economic Turnaround in Germany 

Hopes for a turnaround in Germany, spurred by a hyped government stimulus plan and an anticipated private-sector revival, have yet to resuscitate a moribund economy.  

Corporate and consumer insolvencies are rising. Capacity utilization is at a five-year low with manufacturing orders well below 2018 levels. The German auto, machinery and engineering sectors have shed a net 250,000 jobs since 2018. The VDMA, a respected industry association, just slashed its 2025 forecast from a 2% decline to a 5% drop in real production, indicating that conditions are decaying rather than improving as expected.

Astronomically high energy costs, suffocating regulation and plummeting demand from key export markets in China and the U.S. are to blame. German industry faces high regulatory hurdles: An OECD study recently ranked Germany second-worst among OECD countries for administrative efficiency in exports, requiring a staggering 37 hours of bureaucratic processing per shipment. The number of business laws — measured in pages — has doubled since 2010, and even the normally milquetoast OECD has been scathing in its criticism of Germany’s lack of competitiveness.

Global companies are investing elsewhere, with Stellantis recently announcing a $13 billion capital commitment to build capacity in the U.S., not Germany. BMW is moving some production to Hungary. Even offers of a €10 billion subsidy for a new German plant failed to lure Intel. 

The government is hoping a €46 billion tax break package will revive growth, but tax credits and depreciation breaks already in place have not resulted in improving investment. Mayors from 13 state capitals have written to Chancellor Friedrich Merz, warning of looming municipal financial collapse as revenues decline and budgets are maxed out.

Even a massive €1 trillion stimulus package cannot overcome Germany’s deeper structural problems. Energy policy remains unchanged, with the government doubling down on climate regulations that further disadvantage industry. The much-touted defense spending package has yet to improve domestic manufacturing or jobs data. Consumer sentiment remains shockingly weak, still far below prepandemic levels. While the overwhelming majority of the stimulus has not been spent, the real hope was that private industry and investment would enjoy a resurgence, but that has not happened.

The stock market has begun to reflect a growing pessimism. The DAX soared earlier in the year on hopes of renewed growth and stimulus but has stagnated as investors have yet to see real improvement. Meanwhile, the S&P 500 continues its steady climb, leaving Germany’s equities trailing behind since the second half of this year.

Unable to address its regulatory burdens, reduce energy costs, or revive private sector confidence, Germany has little hope of a turnaround.

Germany Industrial Manufacturing Orders 

Source: Bloomberg

Germany Economic Forecasts 

Source: Bloomberg

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