Picton Mahoney Asset Management says there is a growing equity bubble, most likely concentrated in U.S. large-cap stocks, fuelled in part by enthusiasm surrounding the election of Donald Trump.
The Toronto-based alternative investment firm says in its 2025 economic and stock market outlook report that it sees “the emergence of a large – and growing – equity bubble”, one likely concentrated in U.S. large caps, “of which high-flying technology stocks are the most prominent.”
“The euphoria for equities is being driven by continued belief in the soft-landing narrative, bullish projections for artificial intelligence, and optimism over what Donald Trump’s election could mean for the economy,” Picton Mahoney president and CEO David Picton said in the report.
“Unfortunately, it seems that all the good news has been more than priced in by the market.”
Stocks ended 2024 near record highs, with investors remaining optimistic after the Federal Reserve finally began cutting interest rates and Trump’s election sparked a stock rally and hopes of capital market-friendly economic policies. Some are expecting U.S. markets to lead the way again this year, as the American economy continues to outperform.
In the report, Picton Mahoney notes that the investor exuberance that was virtually unabated through 2024, particularly in the U.S., has resulted in valuations that are “in the vicinity” of previous equity bubbles that culminated in significant pullbacks.
“Equity market valuations are at extremes, positioning is on the full side, and sentiment is exuberant. In other words, the current setup for the U.S. market is not attractive relative to history,” the report said, noting that the cyclically adjusted price-to-earnings (P/E) ratio is sitting at “a lofty 38x”, well above the average. Even after taking out the technology sector, Picton Mahoney says multiples are still well above norms.
“Even if a soft landing occurs this time around, the starting point for valuation expansion is much higher than previous instances where the Fed began an easing cycle,” the report said.
So, what could potentially bring stocks back to earth? Picton says there are several potential catalysts that could trigger “at least a normal correction” in stocks.
“Geopolitics could intrude upon investor complacency. Trump’s policies may turn out to be much less market-friendly than the bulls expect. And then there’s the Fed,” Picton said.
“In our minds, the most likely catalyst for bursting the equity bubble is if stubbornly high core inflation continues to go in the wrong direction, leading to the U.S. central bank dialling back on projected interest rate cuts.”
