A Puzzle or a Bubble?

Two views on why the market keeps rising — and what history might say about it.

A client recently asked me a question I think many are wondering:

“I am trying to understand why the stock market hasn’t tanked due to the chaotic uncertainty that the current administration’s policies have wrought. The article below offers a partial explanation though I’m sure the answer is much more complex. Any chance you might provide me with some insight into what’s perplexing me?”

The article was The Atlantic’s “Does the Stock Market Know Something We Don’t?” by Rogé Karma, published August 7, 2025 (The Atlantic, pp. 1–5), available online at theatlantic.com/economy/archive/2025/08/stock-market-theories/683780/. It frames the market’s rally as a riddle, exploring ideas like AI enthusiasm, passive investing, and political resilience—but without settling on a clear explanation.

For contrast, I paired it with David Rosenberg’s “Yes, We Are in a Bubble,” published August 15, 2025 (Rosenberg Research, pp. 1–8). Where The Atlantic article explores possibilities, Rosenberg sees a classic bubble—with every red flag flashing.

Valuations Beyond the Norm

The Atlantic article highlights how valuations have become unusually stretched, pointing to companies like Nvidia trading at 57 times earnings. For context, the long-run average for the S&P 500 is closer to 16 (Multpl.com). Their perspective: this might just be part of a new era, one driven by artificial intelligence and different investor behavior.

Rosenberg takes the opposite view. He points to the CAPE ratio, which looks at stock prices compared to average earnings over the past 10 years. At 38, it’s now at levels seen only twice before: the dot-com bubble (1999/2000) and late 2021. Both periods were followed by steep declines. His message is that extreme valuations rarely resolve with gentle corrections.

Bob Farrell’s Rule #4 reinforces this: “Exponential, rapidly rising markets usually go further than you think, but they don’t correct by going sideways.” Put another way, valuations can defy expectations for a while, but the adjustment usually comes sharply. (Mr. Farrell was the “Dean of Merrill Lynch Research” otherwise know as the Chief Market Analyst during his tenure from 1957 to 2002).

CAPE Multiple

United States (ratio)

Shading indicates recession
Source: Rosenberg Research, Haver Analytics, Robert Shiller.

The Fuel of Leverage

If valuations are the “price” side of the story, leverage is the “behavior” side. The Atlantic article hints that structural forces, like automatic flows into index funds, could be boosting markets independent of fundamentals.

Rosenberg drills down on debt. Investors are borrowing more than ever to buy stocks—over $1 trillion, up 25% in just the past year. At the same time, managers are sitting on the lowest cash balances in history, around 1%. In practical terms, investors are fully invested and borrowing heavily to stay there. That can accelerate gains when markets rise, but it also magnifies losses when sentiment shifts. Historically, spikes in margin debt have been a warning sign, not a footnote.

Concentration at the Top

Stock market leadership is where both articles align. The Atlantic article highlights the dominance of the “Magnificent Seven.” (I listed the Magnificent Seven at the end of the newsletter.) Rosenberg adds detail: the top 10 stocks now represent almost 40% of the S&P 500, a concentration higher than during the dot-com boom. Two companies alone—Nvidia and Microsoft—account for about 15%.

This matters because broad participation in a rally signals strength, while narrow leadership makes markets fragile. If only a few companies are carrying the weight, the risk of reversal is higher.

Bob Farrell’s Rule #7 captures it neatly: “Markets are strongest when broad, weakest when narrow.”

Stock Market Capitalization: Information Technology as a Share of the S&P 500

United States (ratio)

Shading indicates recession
Source: Haver Analytics, Rosenberg Research page 11

Flows and Over-Ownership

This is where the two narratives diverge the most. The Atlantic article views passive investing as a structural change. When money automatically flows into index funds, stocks that are already large get bought more, regardless of valuation. They call this “mean expansion”—a feedback loop where the biggest stocks keep getting bigger. It’s a pattern that didn’t exist in past cycles.

Rosenberg sees something different: investor overexposure. With households already holding 70% of their financial assets in equities—the highest on record—he argues there’s little new money left to fuel additional upside. In his view, this isn’t about passive mechanics—it’s about investors already being “all in.”

Households Overexposed to the Equity Market

United States: Share of Financial Assets (percent)

Note: Excludes trade receivables, life insurance reserves, pension entitlements, miscellaneous assets
Source: Haver Analytics, Federal Reserve, Rosenberg Report page 13

Narratives vs. Risks

Optimism is the sharpest dividing line. The Atlantic suggests optimism about AI, Fed flexibility, and political stability is part of why markets remain resilient.

Rosenberg calls that same optimism the hallmark of a bubble. He reminds us that every transformative technology—railroads, radio, the internet—came with exaggerated expectations. The technologies were real, but investors often expected too much, too soon.

Bob Farrell’s Rule #9 sums it up: “When all the experts and forecasts agree—something else is going to happen.” Consensus optimism, in other words, is often a contrarian signal.

Pulling It Together

So is this a puzzle or a bubble? The Atlantic article sees an unresolved mystery. Rosenberg sees history repeating itself. Both point to stretched valuations, narrow leadership, and markets running on optimism. The difference lies in interpretation: maybe we’ve entered a new era—or maybe we’re replaying an old cycle.

And that brings us back to one of the most dangerous phrases in investing: “this time is different.” Bob Farrell’s Rule #3 reminds us: “There are no new eras—excesses are never permanent.” Each cycle feels unique while we’re in it, but history has a way of bringing markets back to earth.

Farrell’s Rules In Action

Rule #4: Exponential markets don’t correct by going sideways.
Rule 7: Markets are strongest when broad, weakest when narrow.
Rule 3: There are no new eras – excesses are never permanent.

Final Thoughts…

Times like these are a reminder to stick to your strategy. Markets will always swing between excitement and fear, but your long-term plan is designed to weather both. That means keeping portfolios diversified, continuing to use alternative and uncorrelated stock and bond investments, and rebalancing when positions get out of line. Balance, discipline, and patience are what see investors through cycles like this.

On a Personal Note…

I am writing this note from Steamboat Springs, Colorado.  I have been told that I shouldn’t comment on the temperature here versus Kansas today.  Rachel, Bode and I have been here long enough to settle into our routine.  Bode has his morning mountain bike run along a small stream through the off-leash dog park trail near where we are staying. Then I have morning research time, time to check the markets, talk with the team, client meetings, etc.  Pretty standard schedule except there are these mountains I can see on the horizon.  Last Friday we hiked up to an abandoned uranium mine.  At the gated off entrance to the mine was an American Marmet, climbing the bars and watching us. At least this time I got a picture of the “wildlife.”  Last time, Bode and I saw a bear on a morning walk, we immediately went the other way (No bear pictures to prove what we saw)!

Katelyn joined us this week.  She is living in Detroit now while working on a US Senate race as the National Finance Director.  Of course, she brought Bailey (her 2-year-old golden retriever) with her.  

Garrett might show up in the next week or so.  He is headed out to go camping in Colorado soon.  He just finished up a programming project for us and is looking for his next “gig.”

I’ll catch you next time.

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Sources:

• Rogé Karma, “Does the Stock Market Know Something We Don’t?” The Atlantic, August 7, 2025. Link
• David Rosenberg, “Yes, We Are in a Bubble,” Rosenberg Research, August 15, 2025.
• Magnificent Seven: (Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL/GOOG), Amazon (AMZN), Meta Platforms (META), Nvidia (NVDA), Tesla (TSLA) 
• David Rosenberg, “Revisiting Bob Farrell’s Market Rules To Remember, An economist’s interpretation of Bob Farrell’s 10 Rules to Remember.” January 6, 2025.