Steve Brice punctures the bubble narrative and makes the case for more upside ahead
These days, it is difficult to read any financial newspaper or column without encountering commentary proclaiming that we are in an equity market bubble destined to end in tears. However, I believe US equities still have room to run. A quick look at history – specifically the dot-com bubble of the late 1990s – explains why this might be the case.
Parallels between the dot-com era and today’s markets are currently being drawn left, right and centre. Admittedly, the pace of change and the scale of investment in Artificial Intelligence (AI) appear to be at nosebleed levels. At some point, investors may get carried away with the opportunity set, and it could all very well end in tears – but I do not believe we are there yet.A tale of two de-ratingsInterestingly, despite the alarmist headlines, investors are far from being carried away by the equity-bubble narrative.
US equities have undergone a significant de-rating in 2026, with the price-earnings (P/E) ratio falling by the most since 2022. Yet, a comparison with 2022 reveals that the forces behind the two de-rating episodes are fundamentally different.
In 2022, a massive re-pricing of risk appetite saw central banks around the world hike interest rates sharply. This drove up bond yields against a backdrop of rising inflation, fuelled by supply-side energy shocks stemming from the Russia-Ukraine conflict. The US Fed, for example, hiked interest rates by 4.25% in 2022, including four 75bps hikes – something unprecedented in my working lifetime. This produced what I consider the second-worst year for investors in the past 150 years, as the value of both bonds and equities fell sharply during the first nine months of the year. This episode was topped, in my opinion, only by the US stock market’s plunge by over 50% in 1931, despite the better bond market performance back then.
While bond yields have crept up slightly in 2026, the US 10-year government bond yield is up by only around 0.8%, compared with the 2.35% increase in 2022. Crucially, we should not forget that the baselines differ significantly. The US 10-year government bond yield began 2022 at just over 1.5%, meaning the long-term discount rate rose by more than 150%. By contrast, it began 2026 from a higher base of just over 4%, making this year’s increase a much milder 20%.
What, then, has driven the decline in equity market valuations? Despite recent volatility, US equity prices remain up over 10% this year at the time of writing. Therefore, the P/E ratio decline stems not from falling share prices, but from robust growth in US earnings. For investors, this is great news, as it has allowed them to generate positive returns while valuations look more reasonable than they were at year-end 2025. Some sceptics argue that, while we are not in an equity-price bubble, we are in an earnings bubble. Their contention rests on two concerns: first, that corporate earnings are being inflated by temporary factors, such as one-off unrealised gains on AI industry cross-shareholdings; and second, that current AI capital investment plans are unsustainable. Recent industry calls for controls to slow the pace of AI development are likely to fan these fears. However, I believe both concerns are overblown.The first concern – temporary earnings inflation – is the easier one to dispel. There is good reason for more IPOs to boost companies’ ‘other income’ line in the near term as they get marked at higher valuations. However, our earnings-per-share (EPS) estimates take a conservative approach and assume no contribution from ‘other income’.
As such, any such income would represent a bonus. For context, in Q2 2026, the ‘other income’ line totalled just under USD 100 billion, against expected full-year profits of around USD 3.2 trillion – material, but by no means dominant, given Q2 EPS growth of over 30% y/y excluding this line.
Moving to the second concern, there are currently no signs that the AI capex cycle is about to turn. Indeed, recent earnings releases have led us to upgrade our 2026 and 2027 AI capex estimates, based on company disclosures regarding their investment plans and growing evidence that these investments are highly profitable, with returns on invested capital in excess of 25%. This explains why companies remain focused on investing to develop further AI capacity and capabilities. Only if this were to drop sharply would the capex cycle likely turn.
Beyond the bubble talk – the investment caseUltimately, we remain bullish on the outlook for US equities and the US technology sector. Far from undermining our optimism, widespread market anxiety actively reinforces it because markets typically peak when virtually everyone is bullish.
Accordingly, we would treat the current consolidation or weakness – whether driven by a higher probability of a Fed rate hike, AI capex plan concerns or by seasonal headwinds – as an opportunity to add to US equity allocations.
This positioning, of course, should sit within a well-diversified allocation. Beyond US technology, Asia ex-Japan is a key beneficiary of the AI boom, while gold looks set to bottom out as bond yields peak and Emerging Market central bank demand remains strong.