Ray Dalio’s Bubble Gauge Finds US Stocks Not Dangerously High, But 50 Of The 1,000 Largest Companies Are In ‘Extreme Bubbles’


Ray Dalio.

  • Ray Dalio’s bubble gauge suggests that the US stock market is not dangerously high.
  • However, it found that 5% of the top 1,000 US companies are in “extreme bubbles.”
  • He also identified foam in stock prices, new buyers, optimism, and use of leverage.
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Ray Dalio’s bubble gauge suggests that US stocks are not trading at unsustainable prices and could rise further.

The billionaire co-head of the world’s largest hedge fund, Bridgewater Associates, said in a research note this month that its market gauge is in the 77th percentile for the US stock market as a whole. His bubble readings in the 1920s and 1990s are in the 100th percentile.

However, Dalio pointed out that 5% of the top 1,000 US companies, including several emerging technology players, are currently in “extreme bubbles.” Still, that’s less than half the percentage at the height of the dot-com boom.

Dalio’s bubble gauge combines six measures of the stock market. Are:

  • How high are the prices relative to traditional measures?
  • Are prices discounting unsustainable conditions?
  • How many new buyers have entered the market?
  • How broadly optimistic is the sentiment?
  • Are purchases financed with high leverage?
  • Have buyers made exceptionally extended advance purchases to speculate or hedge against future price gains?

Bridgewater’s boss’s gauge shows that U.S. stocks are priced at the 82nd percentile in traditional metrics and at the 77th percentile in terms of the earnings growth required to outperform bonds.

Its reading for new buyers is in the 95th percentile, largely due to the boom in retail investment. Optimism is at the 85th percentile, in part due to the “exceptionally hot” IPO market, which has been supercharged by a flood of special-purpose acquisition companies, or “SPACs.”

Dalio’s yardstick found that leveraged buying, driven by day traders getting record volumes of call options on individual stocks, are in the 79th percentile.

By contrast, forward purchases are at the 15th percentile, compared to the 100th percentile in the late 1990s, as the pandemic has depressed corporate investment and weighed on the number of mergers and acquisitions.

The hedge fund billionaire gauge is showing some foam in stocks. However, it is positively bullish compared to Warren Buffett’s favorite metric and the recent warning from “The Big Short” investor Michael Burry that the stock market is “dancing on the razor’s edge.”

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