Regardless of the skyrocketing valuations of the Magnificent Seven and nervousness over large AI capital expenditures, one prime economist argues that the U.S. inventory market is lacking probably the most crucial ingredient of a monetary mania: the exit of the “smart money.”
Owen Lamont, a portfolio supervisor at Acadian Asset Administration and a former College of Chicago finance professor, mentioned that whereas the market seems and feels frothy, we aren’t at present in an AI bubble. As he talked to Fortune from his workplace in Boston, the S&P 500 breached 7,000 for the primary time, however he wasn’t dissuaded. To Lamont, the tell-tale signal of a bubble is fairness issuance, when company executives, the final word insiders, rush to promote overvalued inventory to the general public.
“Part of the reason I think there’s not a bubble is I don’t see the smart money as acting like there’s a bubble,” he advised Fortune. “Maybe I should say there’s not a bubble yet.”
In his view, the smoking gun for a bubble forming can be corporations going public and promoting fairness. That may be a play for the dumb cash, he added.
Lamont—who has additionally taught at Harvard, Yale and Princeton, and blogs for Acadian beneath the moniker Owenomics—dialed again to among the monetary historical past classics to make his level.
“The one thing we see in bubbles going back to the South Sea Bubble of 1720 is issuance,” he mentioned. For readers who aren’t monetary historians, Lamont was referring to a joint inventory firm from the early (or earlier) days of capitalism, involving the UK’s financing through the Struggle of the Spanish Succession.
Issuance and the opposite three horsemen of the bubble apocalypse
In 2026, a flood of recent shares isn’t hitting the market, because it did through the dotcom crash of 2000 and the speculative frenzy of 2021, which Lamont considers a bubble, not like most of his friends. Companies are doing the other of that proper now. Prior to now yr, U.S. corporations have engaged in roughly $1 trillion price of inventory buybacks, Lamont famous, as he detailed in his November weblog publish, “A trillion reasons we’re not in an AI bubble.” Companies are the sensible cash, he defined, and once they promote fairness, that’s an indication the fairness is overpriced. However shares in open float have been shrinking.
Lamont’s bubble-detection framework depends on “Four Horsemen”: overvaluation, bubble beliefs, issuance, and inflows. Whereas he conceded that three of those are current available in the market of early 2026—valuations are excessive, retail traders are piling in, and sentiment is frothy—the absence of issuance disqualifies the present cycle from bubble standing. Actually, it’s “baffling” that there aren’t extra IPOs. “They haven’t come yet and maybe they’re coming in 2026,” he mentioned. In 1999, as an example, the market absorbed over 400 IPOs. And in 2021, the market was awash in SPACs and meme shares. As we speak, the panorama is surprisingly quiet.
The economist defined that he developed this framework out of his “weird background,” an preliminary tutorial curiosity in company finance derived from his curiosity about causes of the Nice Despair. “I wouldn’t claim that my four horsemen are the only way to do it or the best way to do it, but they’re the way that seemed most empirically relevant to me.”
And with a little bit of historic perspective, Lamont famous that U.S. shares could also be costly however they’re not at dotcom extremes. He graduated from faculty in 1988, and recalled the Japanese inventory market bubble being really “incredible” at that time, far worse than any circumstances immediately. He referenced the well-known Shiller CAPE ratio. One among many indicators created by Nobel prize-winning economist Robert Shiller, this divides a inventory or index value by its 10-year common of inflation-adjusted earnings per share, form of a long-range viewpoint of the basic price-to-earnings ratio. On the peak of 1999, Lamont famous, the CAPE was a forty five, and immediately it’s 40, however Japan was over 90 within the late ’80s.
Lamont recalled a paper launched on the time from two finance professors, James Poterba and Ken French, that was known as “Are Japanese Stock Prices Too High?” A yr later, the title needed to be modified to the previous tense, as a result of the market had crashed a lot.
When Lamont was educating on the College of Chicago within the mid-Nineteen Nineties, he added, he noticed himself as believing the market was largely environment friendly, however what he noticed in that point moved him nearer to behavioral economics. “Bubbles are a behavioral phenomenon and they embody people making cognitive mistakes,” he mentioned. In 1996, he produced tutorial analysis arguing the market was overvalued—solely to observe the S&P 500 double and the NASDAQ triple over the subsequent few years. He suggests we could also be in the same place immediately: “Maybe we’re in the early innings” of the AI story.
When the dotcom bubble did burst, Lamont added, he and lots of of his friends have been surprised. “I would say it really changed our view of whether the market is rational. And I remember going to academic conferences, like in 1999, and … many, many finance professors were like, ‘This is crazy, it makes no sense, it’s gotten out of hand.’” A couple of years later, he added, talking slowly in order to be exact, “it’s not true that every person who believed in rational asset pricing changed their mind … but it’s certainly true that only those capable of changing their mind did change their mind.”
The strange world of peak-bubble IPO fraud
“I define a bubble as the price has gone up and people are trading, owning, buying an asset that they believe are overvalued,” Lamont defined.
Whereas this market has these preconditions—a revolutionary expertise and spectacular revenue development—the cycle has not but reached the terminal section the place insiders rush for the exits. In his state of affairs, the Nasdaq 100 doubles in a yr and the Shiller CAPE ratio surges towards 80, echoing Japan in 1989. This may additionally unleash a wave of fraud, he added.
“One of the wonderful things about the IPO market is you don’t need to be a good company to IPO. You just need to have gullible retail investors think you’re a good company,” Lamont mentioned, jokingly. He requested hypothetically, the place are the fraudulent corporations in immediately’s market? “We had plenty of fraudulent companies in 2021, so I’m disappointed by the lack of creativity of the white-collar criminals,” he added, tongue planted in cheek.
Whereas skeptics fear that Huge Tech’s billions in AI spending will yield poor returns, Lamont mentioned he considered this as a “rational gamble” reasonably than speculative mania. He in contrast the present AI build-out to drilling for oil: an costly funding with unsure chance, however a rational company technique nonetheless. He additionally in contrast it to a different well-known high-risk capex cycle: railroads, arguing that such booms typically happen within the early or center phases of transformative applied sciences, not simply on the finish.
“I think that it’s quite plausible to say that [the hyperscaler companies are] building too many data centers and they don’t need them,” Lamont mentioned, referring to the middle of the potential AI bubble concentrated round Nvidia and OpenAI, with Microsoft and Oracle orbiting. “But it doesn’t mean it’s irrational on the face of it, and it doesn’t mean that they’re overvalued today.”
Many new applied sciences have resulted in overbuilding, like constructing too many railroads and constructing too many oil wells, however that additionally doesn’t assure a bubble. “Historically, it’s true that at times when there’s a huge wave of capex, that’s not a good time to invest in the stock market. That’s a time when the market’s overvalued.” When requested if traders can buy gold once more, coming a number of days after it first handed $5,000 per ounce, Lamont responded, “I don’t know about that one.”
To Lamont’s level, many prime market watchers consider that is an AI increase, not a bubble, with Apollo International Chief Economist Torsten Slok, as an example, releasing a chartbook likening the productiveness increase from AI to the adoption of PCs and the web. “While there are questions about the magnitude of the impact at the macro level,” Slok wrote, “it is clear that there are already significant sector impacts including in DevOps software, robotic process automation and content management systems.”
An IPO mega-cycle?
For these waiting for the tip, Lamont advised maintaining a tally of the calendar for 2026. If high-profile personal corporations like SpaceX lastly determine to go public, triggering a wave of copycat IPOs, the “smart money” might lastly be signaling the highest.
Ominously, as Lamont was speaking to Fortune, the Monetary Instances reported that the biggest personal fairness agency on the earth, Blackstone, was making ready a blockbuster yr for IPOs. Jonathan Grey, president of the asset administration big, advised the FT that 2026 includes “one among our largest IPO pipelines in historical past.”
Equally, Kim Posnett, the co-head of funding banking at Goldman Sachs, not too long ago predicted in a Q&A with Fortune that the market is getting into an IPO “mega-cycle” that can be outlined by “unprecedented deal volume and IPO sizes.” She distinguished it from the 2 durations Lamont alluded to, the late ’90s dotcom wave and the 2020-21 surge, saying that the “next IPO cycle will have greater volume and the largest deals the market has ever seen.” As if on cue, The Wall Avenue Journal reported on Thursday that OpenAI is planning to go public within the fourth quarter of 2026, citing individuals conversant in the matter.
This story was initially featured on Fortune.com
