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Despite the skyrocketing valuations of the Magnificent Seven and anxiety over massive AI capital expenditures, one top economist argues that the U.S. stock market is missing the most critical ingredient of a financial mania: the exit of the \u201csmart money.\u201d<\/p>\n
Owen Lamont, a portfolio manager at Acadian Asset Management and a former University of Chicago finance professor, said that while the market looks and feels frothy, we are not currently in an AI bubble. As he talked to Fortune<\/em> from his office in Boston, the S&P 500 breached 7,000 for the first time, but he wasn\u2019t dissuaded. To Lamont, the telltale sign of a bubble is equity issuance, when corporate executives, the ultimate insiders, rush to sell overvalued stock to the public.<\/p>\n \u201cPart of the reason I think there\u2019s not a bubble is I don\u2019t see the smart money as acting like there\u2019s a bubble,\u201d he told Fortune<\/em>. \u201cMaybe I should say there\u2019s not a bubble yet.\u201d<\/p>\n In his view, the smoking gun for a bubble forming would be companies going public and selling equity. That would be a play for the dumb money, he added.<\/p>\n Lamont\u2014who has also taught at Harvard, Yale, and Princeton, and blogs for Acadian under the moniker Owenomics\u2014dialed back to some of the financial history classics to make his point.<\/p>\n \u201cThe one thing we see in bubbles going back to the South Sea Bubble of 1720 is issuance,\u201d he said. For readers who aren\u2019t financial historians, Lamont was referring to a joint stock company from the early (or earlier) days of capitalism, involving the United Kingdom\u2019s financing during the War of the Spanish Succession.<\/p>\n In 2026, a flood of new shares isn\u2019t hitting the market, as it did during the dotcom crash of 2000 and the speculative frenzy of 2021, which Lamont considers a bubble, unlike most of his peers. Corporations are doing the opposite of that right now. In the past year, U.S. companies have engaged in approximately $1 trillion worth of stock buybacks, Lamont noted, as he detailed in his November blog post, \u201cA trillion reasons we\u2019re not in an AI bubble.\u201d Companies are the smart money, he explained, and when they sell equity, that\u2019s a sign the equity is overpriced. But shares in open float have been shrinking.<\/p>\n Lamont\u2019s bubble-detection framework relies on \u201cFour Horsemen\u201d: overvaluation, bubble beliefs, issuance, and inflows. While he conceded that three of these are present in the market of early 2026\u2014valuations are high, retail investors are piling in, and sentiment is frothy\u2014the absence of issuance disqualifies the current cycle from bubble status. In fact, it\u2019s \u201cbaffling\u201d that there aren\u2019t more IPOs. \u201cThey haven\u2019t come yet, and maybe they\u2019re coming in 2026,\u201d he said. In 1999, for instance, the market absorbed over 400 IPOs. And in 2021, the market was awash in SPACs and meme stocks. Today, the landscape is surprisingly quiet.<\/p>\n<\/p><\/div>\n The economist explained that he developed this framework out of his \u201cweird background,\u201d an initial academic interest in corporate finance derived from his curiosity about causes of the Great Depression. \u201cI wouldn\u2019t claim that my four horsemen are the only way to do it or the best way to do it, but they\u2019re the way that seemed most empirically relevant to me.\u201d<\/p>\n And with a bit of historical perspective, Lamont noted that U.S. stocks may be expensive but they\u2019re not at dotcom extremes. He graduated from college in 1988, and recalled the Japanese stock market bubble being truly \u201cincredible\u201d at that point, far worse than any conditions today. He referenced the famous Shiller CAPE ratio. One of many indicators created by Nobel Prize\u2013winning economist Robert Shiller, this divides a stock or index price by its 10-year average of inflation-adjusted earnings per share, sort of a long-range viewpoint of the classic price-to-earnings ratio. At the peak of 1999, Lamont noted, the CAPE was a 45, and today it\u2019s 40, but Japan was over 90 in the late \u201980s.<\/p>\n Lamont recalled a paper released at the time from two finance professors, James Poterba and Ken French, that was called \u201cAre Japanese Stock Prices Too High?\u201d A year later, the title had to be changed to the past tense, because the market had crashed so much.<\/p>\n When Lamont was teaching at the University of Chicago in the mid-1990s, he added, he saw himself as believing the market was mostly efficient, but what he saw in that time moved him closer to behavioral economics. \u201cBubbles are a behavioral phenomenon, and they embody people making cognitive mistakes,\u201d he said. In 1996, he produced academic research arguing the market was overvalued\u2014only to watch the S&P 500 double and the Nasdaq triple over the next few years. He suggests we may be in a similar position today: \u201cMaybe we\u2019re in the early innings\u201d of the AI story.<\/p>\n When the dotcom bubble did burst, Lamont added, he and many of his peers were stunned. \u201cI would say it really changed our view of whether the market is rational. And I remember going to academic conferences, like in 1999, and\u2026many, many finance professors were like, \u2018This is crazy, it makes no sense, it\u2019s gotten out of hand.\u2019\u201d A few years later, he added, speaking slowly so as to be precise, \u201cit\u2019s not true that every person who believed in rational asset pricing changed their mind\u2026but it\u2019s certainly true that only those capable of changing their mind did change their mind.\u201d<\/p>\n \u201cI define a bubble as the price has gone up and people are trading, owning, buying an asset that they believe [is] overvalued,\u201d Lamont explained.<\/p>\n While this market has those preconditions\u2014a revolutionary technology and spectacular profit growth\u2014the cycle has not yet reached the terminal phase where insiders rush for the exits. In his scenario, the Nasdaq 100 doubles in a year and the Shiller CAPE ratio surges toward 80, echoing Japan in 1989.\u200b This would also unleash a wave of fraud, he added.<\/p>\n \u201cOne of the wonderful things about the IPO market is you don\u2019t need to be a good company to IPO. You just need to have gullible retail investors think you\u2019re a good company,\u201d Lamont said, jokingly. He asked hypothetically, where are the fraudulent companies in today\u2019s market? \u201cWe had plenty of fraudulent companies in 2021, so I\u2019m disappointed by the lack of creativity of the white-collar criminals,\u201d he added, tongue planted in cheek.<\/p>\n While skeptics worry that Big Tech\u2019s billions in AI spending will yield poor returns, Lamont said he viewed this as a \u201crational gamble\u201d rather than speculative mania. He compared the current AI build-out to drilling for oil: an expensive investment with uncertain probability, but a rational corporate strategy nonetheless. He also compared it to another famous high-risk capex cycle: railroads, arguing that such booms often occur in the\u00a0early\u00a0or middle stages of transformative technologies, not just at the end.<\/p>\n \u201cI think that it\u2019s quite plausible to say that [the hyperscaler companies are] building too many data centers and they don\u2019t need them,\u201d Lamont said, referring to the center of the potential AI bubble concentrated around Nvidia and OpenAI, with Microsoft and Oracle orbiting. \u201cBut it doesn\u2019t mean it\u2019s irrational on the face of it, and it doesn\u2019t mean that they\u2019re overvalued today.\u201d<\/p>\n Many new technologies have resulted in overbuilding, like building too many railroads and building too many oil wells, but that also doesn\u2019t guarantee a bubble. \u201cHistorically, it\u2019s true that at times when there\u2019s a huge wave of capex, that\u2019s not a good time to invest in the stock market. That\u2019s a time when the market\u2019s overvalued.\u201d When asked if investors should buy gold again, coming a few days after it first passed $5,000 per ounce, Lamont responded, \u201cI don\u2019t know about that one.\u201d<\/p>\n To Lamont\u2019s point, many top market watchers believe this is an AI boom, not a bubble, with Apollo Global chief economist Torsten Slok, for instance, releasing a chartbook likening the productivity boom from AI to the adoption of PCs and the internet. \u201cWhile there are questions about the magnitude of the impact at the macro level,\u201d Slok wrote, \u201cit is clear that there are already significant sector impacts including in DevOps software, robotic process automation and content management systems.\u201d<\/p>\n For those watching for the end, Lamont suggested keeping an eye on the calendar for 2026. If high-profile private companies like SpaceX finally decide to go public, triggering a wave of copycat IPOs, the \u201csmart money\u201d may finally be signaling the top.<\/p>\n Ominously, as Lamont was talking to Fortune<\/em>, the Financial Times<\/em> reported that the largest private equity company in the world, Blackstone, was preparing a blockbuster year for IPOs. Jonathan Gray, president of the asset management giant, told the FT<\/em> that 2026 comprises \u201cone of our largest IPO pipelines in history.\u201d<\/p>\n Similarly, Kim Posnett, the cohead of investment banking at Goldman Sachs, recently predicted in a Q&A with Fortune<\/em> that the market is entering an IPO \u201cmegacycle\u201d that will be defined by \u201cunprecedented deal volume and IPO sizes.\u201d She distinguished it from the two periods Lamont alluded to, the late \u201990s dotcom wave and the 2020\u201321 surge, saying that the \u201cnext IPO cycle will have greater volume and the largest deals the market has ever seen.\u201d As if on cue, the Wall Street Journal<\/em> reported on Thursday that OpenAI is planning to go public in the fourth quarter of 2026, citing people familiar with the matter.<\/p>\n This story was originally featured on Fortune.com<\/p>\n<\/p><\/div>\n