As Bitcoin nears the $100,000 mark, stocks of companies related to cryptocurrencies have experienced substantial gains. However, this surge has sparked concerns about potential overheating in the broader stock market. Some analysts warn that the current interest in risk assets, including Bitcoin and stocks, is reminiscent of the bubble levels seen in 2021. During that period, investors briefly enjoyed massive gains, only to face a punishing bear market the following year, leading to significant losses for inexperienced investors.
Currently, certain areas of the stock market appear overvalued, with Carvana Co. (CVNA, Financial) being a notable example. According to FactSet, the stock of this automotive-focused e-commerce company has surged approximately 370% year-to-date. The S&P 500's valuation has also risen to over 22 times the expected earnings for the next 12 months, a level not seen since 2021.
George Cipolloni, a portfolio manager at Penn Mutual Asset Management, expressed concerns about another unsustainable market frenzy that could harm investors. While it's challenging to determine if market excitement has reached dangerous levels, he noted that enthusiasm and speculative bubbles are more prevalent now than a month ago.
Some Wall Street analysts have observed signs of excessive investor optimism. Scott Chronert from Citigroup highlighted that the Levkovitch Index, a measure of market sentiment, has risen significantly in recent weeks. Although it remains below the peaks of 2021, Citigroup has added sentiment to its list of reasons for a cautious market outlook.
The macroeconomic backdrop has changed since 2021, with higher interest rates and bond yields. As of last week, the 10-year U.S. Treasury yield was around 4.40%, compared to 1.50% in December 2021. Mohannad Aama, a portfolio manager at Beam Capital Management, noted that higher bond yields increase market risks. Despite rising borrowing costs, both stocks and Bitcoin have thrived on investor enthusiasm for "Trump trades."
