How to spot (and survive) a market bubble

You can also listen on: Spotify, Apple Podcasts, Amazon

The artificial intelligence (AI) boom has produced great returns for investors but they increasingly worry that we have entered a bubble – with a painful “bust” around the corner.

Franklin Templeton investment strategist Michael Browne joins ii’s Dave Baxter to tackle the subject, looking at whether we might be in a bubble but also how to spot one and what to actually do to protect your money.

• Invest with ii: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

Dave Baxter, senior fund content specialist at interactive investor: Hello and welcome back to On the Money, our show looking at how to make the most out of your savings and your investments.

I’m Dave Baxter, senior fund content specialist here at ii and I’m delighted to be in the hosting chair for the first time.

We’re going tackle a pretty big topic today that is market bubbles. Are we in a bubble or more than one?

What kind of indicators might tell us whether we’re in that? And most importantly for me, as an investor, what can you actually do if we’re in a bubble?

We have a really great guest with us today - Michael Browne, investment strategist at Franklin Templeton. Michael has been in the investment space for several decades.

He’s seen many a market boom, many a market bust, many a market cycle, and should be able, hopefully, to share some really great insights on this quite meaty topic.

Michael Browne, investment strategist at Franklin Templeton: I’ve been through a few days. Thank you very much indeed. It’s a great topic and I think it’s really interesting because, as you say, if you hang around the markets long enough, you’ll do two or three of these.

Dave Baxter: Obviously, there’s lots of nuance that we will get into, but let’s kick off with the big question. Do you think when we come to artificial intelligence (AI), when we come to stock markets in general, that we’re in a bubble at the minute, and what is your rationale either way?

Michael Browne: I don’t think we’re in a bubble at the minute. It could develop. It’s not impossible for it to develop, and I think this is where we have to have a thought process as to what a bubble is and what it isn’t. And what’s the thing that’s a notch below a bubble? Because we have lots of those and that’s a boom.

So, if you think about it, we go from enthusiasm to boom, boom to bubble, then you can start to think of differentiating factors between boom and bubble. Lots and lots of booms happen.

One of my favourites, which went completely unnoticed, is the oil and gas capex boom of 2010 to 2014, which by the way dwarfs anything that’s going on in AI at that moment in time. We’re talking £1 trillion a year, £1.5 trillion a year over a four-year period. But we didn’t notice that because that was a boom in that particular industry.

You can go out and find those. So, that’s a really good example of when a boom doesn’t become a bubble. A bubble is when you’ve got to have that all-encompassing, all-focusing exuberance and maybe we’ll get into this in a bit. I’ll just define a bubble – it’s got to be money, mania and markets.

• Investment outlook: expert opinion, analysis and ideas
• Why I’m happy to buy shares at record highs

Dave Baxter: So obviously, it’s very difficult to tell when we’re in a bubble and there are perhaps different indicators. I was thinking before this that you might have quantitative things. For example, I was reading up on the AI bubble discussion and people were citing the fact that if you look at things like price/earnings ratios in the Mag Seven, it looks much less challenging than, for example, before the dot-com...

Michael Browne: Doesn’t look too bad, does it? Absolutely. It’s about half the rate at the present moment in time.

Dave Baxter: But also, I suppose you have more qualitative kind of indicators. So, this might be general sentiment. This might be the old adage about getting into a cab and having the taxi driver recommend stock picks to you and that kind of thing, which admittedly is a bit patronising towards taxi drivers.

Michael Browne: We’re going to have robotaxis [because of] AI.

Dave Baxter: Yes, it’s already a challenging time. But what kind of indicators do you look at when you’re trying to make a call on this?

Michael Browne:So, you have to go from a boom to a bubble. Let’s hold that concept in place. First, you need obviously an ample supply of liquidity in the markets. It’s absolutely critical. So, you’ll be in a period where interest rates will be at a low or will [have] stagnated at a level for quite a long period of time. So, that’s an element of confidence in the lending markets, elements of confidence in the banking side, so you probably have quite low default rates at that moment in time. So, the liquidity conditions are good. I mean, they don’t have to be wildly fantastic, they’re just good, right?

Then I think you have to look at this word ‘mania’. So first, we’ve got that money piece, it’s in there, we’ve got plenty of liquidity, and there’s some great examples in history. There’s a great one from Germany in 1871, which led to the crash in 1873. They got five billion in gold from France as part of war reparations, the 1870 war, and that then went straight into the system with liquidity. So, that’s a great example of a bubble being created by external cash coming into an economy. So, you need that cash, right? That’s the first thing.

Then you need mania. What is mania? You need that sense of elevated extreme changes in mood, where people are rushing around getting very excited about things, and if it drops 6% on a day, they get very disappointed by that. So, you have really big swings in mood [and] it starts to catch a wider attention. It starts to catch the attention of the wider population.

Dave Baxter: Do you not think we’ve kind of reached that point with stocks like NVIDIA Corp (NASDAQ:NVDA)? Nvidia already has huge expectations every time a trading update rolls around, and you can have quite big moves. Even if they actually satisfy or exceed expectations, you can have big drops and so on.

Michael Browne: Well, that’s where I would take that definition a little bit further. Yes, people know about it. We have to be careful in our industry, if you like, is it talked about on the Clapham omnibus - if I can use a different transportation expression about normal people - as opposed to what we’re doing, which is talking about something because it’s part of our daily lives, and it’s become dominant in indexes, etcetera.

What I would look for is a sense almost of high energy and social bonding, where you become part of a club. You feel you’re part of that exclusive club where you’re on to something and other people are not on to something. That’s part of that mania, that overenthusiastic, almost as if you’re a football supporter and you travel anywhere to see your club play. That’s the kind of excitement that I’m looking to see in people and investors, and that starts to attract a much broader base of investors than the normal ones. That’s why I think it’s really interesting. We have to be clever today about it.

Andrew Sorkin put out his book on the Wall Street Crash just before Christmas. It’s a really good book because he’s got lots of social detail in there. And if you put it with [John Kenneth] Galbraith’s great tome, then you’d have the whole thing put together. But it’s that element of, ‘Oh, we’re still on the street corners and we watch the ticket tapes and we watch the prices coming out. Oh, I’m part of the club. I’m standing on the street corner - I’m doing it.’

That’s the kind of atmosphere that I’d want to get. I think where we see that today is obviously on social media. You can find those sort of clubs coming through and that sort of ‘I’m part of the gang, I’m part of the team’ sort of sense on social media - that’s where to look at it in terms of where we are.

Now, are we there at this point in time? No, I don’t think we are. I think we are in other assets, but [not] in stocks.

Dave Baxter: What other assets do you think we’ve hit that point with?

Michael Browne: Well, we have the great unregulated asset of crypto, and I really think we’ve seen some of the elements there. There are other elements in there by the way which really resonate from my point of view, going back over history, in that area, because a part of how we recognize that the bubble is bursting is to think about fraud.

There will always be frauds in these things. There’s always been frauds all the way through these elements. I’ve kind of brought it in a bit early, but there’s quite a lot of fraud in those particular areas because it’s a completely unregulated market.

So, how do we avoid frauds? You can’t in these circumstances, there will be people who will do that and spotting that, and spotting and understanding that first failure and that first fraud is a key point in terms of finding somebody who’s taken advantage through inappropriate means of that mania that you’re experiencing.

• The big question for 2026: has AI caused a stock market bubble?
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

Dave Baxter: So, let’s turn to another asset. Obviously, sometimes people are now comparing crypto with it - which is perhaps a different conversation entirely - but last year, actually, over the last two years, we’ve seen the gold price surge enormously and, unfortunately, we’ve had more geopolitical strife and very kind of worrying development so far in 2026. Once again, we’ve seen record highs being breached with gold, silver, and so on. Where do you stand on the conversation that’s been ongoing about gold being in a bubble?

Michael Browne: Gold’s a really interesting asset. First, it’s been around forever. It’s been a valuable asset forever. It has got, what? 5,000, 6,000, 7,000 years of history in terms of being worth something and people have regarded it as valuable.

So, you’re dealing with something that’s always part of your monetary psyche. So, does it have value? Yes, gold does have value. That makes it different. It has the longevity to prove that it has value, but that doesn’t mean to say that you can’t have a bubble in an asset such as gold.

The way I would look at gold is inflation adjusted. For years, from the mid-1908s, where, again, the gold price was really propelled by trouble in the Middle East and wars, etc. From the mid- to late 1980s to, really, four or five years ago, the gold price was falling in real terms over that period, even though the price was still accumulating.

Then you have this extraordinary spike upwards over the last couple of years. So, something must have changed in the demand patterns for gold. Then people have come along with leverage - and I’d love to know how much leverage there is in everybody’s gold purchase at this point in time, how much the brokers are offering you in terms of debt, to buy gold. But there was an element of catch-up undoubtedly in terms of the real price of gold.

Has it gone too far too fast? Well, I think anybody with an iota of market history in their minds would say that it probably has. But will it still retain a value at the end of this? Yes, it will. That’s why I think gold’s a little bit more difficult. We have that sense of our monetary systems used to be linked to gold.

Silver, I think, is less so. Silver is a market that has, since it was demonetised 150 years ago, is an asset that is prone to speculation, and we’ve seen people over time trying to corner the silver markets on several different occasions.

Dave Baxter: I suppose one related point is that we talk about gold doing very well, we talk about AI stocks doing very well, crypto and so on. If we look at this more widely, last year was quite interesting because it was pretty much an everything rally. Maybe things like Indian equities struggled, but most assets, most markets…

Michael Browne: There’s quite a high degree of correlation across assets, yes.

Dave Baxter: Yeah. So, even if we’re not in a bubble, what does that mean for investors, and do we need to err on the side of caution there?

Michael Browne: From an equity point of view, let’s put that into context, right? We had the biggest single year of mutual fund equity outflows in the United States since this millennium last year.

So, we have stock prices rising at the same time as US investors took an awful lot of money out, more than they’d ever taken before, and sat on it.

So, there’s something else that’s going on here again. And, in local terms, most indices weren’t very far apart. But obviously in dollar terms because of the weakness of the dollar against the euro, and other currencies, clearly that differential became much greater and, of course, it’s the first year for eight or nine - I can’t remember exactly how many years - where non-US equities outperformed US equities because of that dollar differential.

Dave Baxter: I think it was the first time in 25 years that the US underperformed all the major indices.

Michael Browne: Exactly. It’s a very long time.

So, we have that situation and that’s currency-related rather than local-value related.

But yes, you’re right. It was a very broad-based, mid teens-ish sort of rally across equity markets as a whole. The reason for that, I think, is pretty straightforward and it is that the conditions at the moment are quite benign, they are quite resilient.

We can [ask whether we] are at the start of a cycle rather than the end of the cycle. I think that’s a really interesting discussion because a number of factors will play that particular way. The AI story we can clearly see is now having a genuine effect on profitability.

The final piece is that the amount of equities we have is shrinking, not expanding, at this point in time. We’ve had poor IPO markets for several years now.

We’ve had private equity obviously coming into the market and purchasing what they think is really cheap assets, [and] they can’t release it back in, but that’s fine. So, we actually have an equity diminution rather than expansion, and what breaks to change that particular process? Maybe it will break this year with a number of IPOs, some very high-profile ones are scheduled.

• IPO market outlook for UK in 2026
• Fund Focus: the ‘good’ funds that had a bad year

Dave Baxter: SpaceX and so on.

Michael Browne: SpaceX, ChatGPT, OpenAI. All these are almost on the slate at this point in time. Whether they come or not will depend on market conditions and, of course, on the price that people can get relative to the valuations they’ve already paid.

But, yes, diminution of equity has been a feature, so the markets have been able to withstand quite a big outflow from their mutual fund world at the same time as rising, and at the same time, of course, equities’ negative process has been going. So, everything is getting scarcer.

Dave Baxter: Yeah. It’s interesting discussing whether we’re in a boom or whether we’re in a bubble, and the key thing as an investor is, what do you do about it? So, I’d like to tackle both those issues.

Perhaps it would be interesting to start with a bubble because, when you think about market crashes, also when you think about some big events, for example the Brexit vote, Donald Trump [getting elected] in 2016, you could have correctly forecast what would have happened, but markets then didn’t exactly behave how you would expect them to.

So, if, say, someone disagrees with you and they think we are in a bubble, what should they do?

Michael Browne: Let’s do the bubble piece and let’s do events separate because I think they are two separate elements.

The way to spot a bubble, or a bubble closing out, because I think that’s more the question, is that first of all, interest rates are rising.

In every single instance of every bubble that I’ve looked at since 1720, the South Sea Bubble, rates have been rising.

Rates started rising in 1928, not 1929, they were rising a long time before the market actually peaked. So, the first thing is you start to see money taken away, right?

The second thing is that you will have one or two businesses associated with that particular mania at that moment in time go bust.

They are not auto parts businesses. We’re looking for something around the AI space that goes bust.

And at that point, [people will make] a really interesting comment.

They’ll say, ‘Oh, don’t worry about that. It’s just a bad business model.’ And you say, ‘Really? But it’s in your section.’

And they’ll reply, ‘No, it’s just a bad business model.’

In other words, you can feel the tide’s beginning to turn at that moment in time. So, people will see it, but they will ignore it.

This is just an aside, but it’s amusing that Jamie Dimon [JPMorgan Chase boss) made his cockroach comment last year. And [former Fed chair Alan] Greenspan made the irrational exuberance comment in December 1996. That was almost four years before the markets peaked out. So, again, indicators like that are worth holding.

But one, rates are going up. Two, somebody goes bust in the sector. So, somebody dents the confidence a little bit, but everybody brushes over it. Three, as rates start to go up, that question of leverage in both positions and the businesses starts to have an impact.

Businesses want more capital, they need some more capital to continue going forward because they will be debt laden, this is the traditional way. It’s going to be different with AI because there’s a lot of cash in this business.

But debt-laden businesses will start coming to markets for injections of capital and they will struggle to get some away. So, there’ll be another early indicator.

‘Oh, that issue didn’t get so done so well, it’s left a bit with the underwriters. Oh, but it’s fine. They’ll have the next trading results.’ You’ll hear all of that.

Then you will start to see the market unravel. When the market starts to unravel and you get reverse velocity, it’s when the leverage comes out.

We saw this with bitcoin on 19 October last year. Suddenly, we realised a lot of people lent a lot of money against a lot of bitcoin positions and they were forced to liquidate. So, forced liquidation then becomes your unravelling. Now we’re in it, then, at that point in time.

But there’s one further indicator that I think you would always see here and you’ll probably see it before you get to that reverse velocity piece, and that’s fraud. There will be fraud. There has always been fraud in every single one of these bubbles.

So, I think there are some really strong indicators. If you believe it’s a bubble and you see those four factors come through, then you can say, yes, I should be out at this point in time and I need to sit on my hands.

• The FTSE 100 has broken 10,000: which active funds are beating it?
• DIY Investor Diary: ‘quant’ approach goes big on gold and bonds

Dave Baxter:Is that the best approach, then? I mean, to survive in a bubble bursting? How far does diversification go? What have the approaches been that have served investors well?

Michael Browne: There’s always diversification, but some of that diversification has to rely on the actions elsewhere. Remember, I’m talking about period when rates are rising, so your diversification into longer-term bonds is not going to be there.

You might get some diversification from quality credit corporate debts, so BBB and better, high-quality credit at the short term, so in the two-year level as well.

You might get some in terms of cash. That would be a classic holding point and obviously some of the gold buying that we’ve seen must be as part protection; people trying to diversify assets and struggling, and really running out of diversified assets to hold.

So, there are areas where you can diversify. I can’t remember who said it, but ‘the best way to understand a bubble is to be involved’.

That’s why I would prefer to give people a checklist of elements to say, right, this checklist is now coming through. Here are the three or four points you need to look at, and if you see all those come together, then, yes, I would absolutely sit on your hands at this point in time. I’d go to very low-risk assets at this point. Are we there? No, we’re not.

Dave Baxter: What kind of low-risk assets?

Michael Browne: Well, the key then is going to be dependent on your liability structure. If you’re a UK investor, you’re probably going to end up holding as much cash as you possibly can at that point in time within your banking regulatory limits, which I think is £120,000.

So, you could move a lot of assets across several different banks and still be protected by the liability schemes. You can hear that I’m beginning to think like 2008 again.

But if you had a real proper bubble - I don’t think we’re anywhere near that at this point in time – that’s how you’re going to have to think.

Dave Baxter: I suppose, then, we are running into the classic behavioural problem of if you are sitting on cash, missing out on market movements, when do you actually decide to reinvest and so on?

Michael Browne: Yeah. For the individual investor, they have an astonishing range of tools today that they didn’t have in 2008.

There are goodness knows how many short exchange-traded funds (ETFs) that you could go to this point in time, and you probably should, because the best way, again, of spotting the bottom is actually to be involved in the market.

One of the real things that we’ve seen about markets over the last few booms/crashes events is how quickly they get to their lows. I mean, 17 March 2020 was the low for markets in Covid, right? It was, what, three weeks after the Italians had shut the north of Italy down? It’s very, very, very fast moving. Markets fall very quickly and rise slowly, and I think people need to remember that as well.

Dave Baxter: Yeah. So, any other key lessons you want to share from your rich history of bubbles, booms, and so on? Any things that investors should bear in mind?

Michael Browne: Well, if you hit money, mania and markets, that’s the key piece to go through. If you take those three headings and you think about them, and you work with them, your ability to spot the bubble will be great.

Then you have to also play the game of boom or bubble, and I come back to the point that the oil boom of the early 2010s, by the way, just after we’d had a great financial crash and apparently there was no money about, right? No, no, they were able to finance that. Absolutely fine.

Think about the mobile telephony boom in the late 1980s, which culminated in price terms of Vodafone buying Mannesmann at that particular point in time. That was a boom, but it wasn’t a bubble.

Think about the cable operators’ boom in the late 1980s, the regulator opened up the streets and you could put cables down the streets, etc. What did we have? Eight, nine companies at that point to raise capital to do that? We’ve got one company today because they were never able to make enough money from each individual position to be able to actually justify the capital that was in the ground at that point in time.

So, I would say to investors, you really need to understand what the difference between a boom and a bubble is. Because your behaviour will be completely different. In a boom, that sector becomes off-limits, you don’t want to get involved in it, but there’ll be plenty of other sectors that you do want to get involved in. And you may well have a completely different interest rate backdrop at that point in time, which will not exist in the bubble moment.

Dave Baxter: So, stick to your triple Ms, or your three Ms, look for rates rising, look for things like fraud, debts, that kind of thing.

Michael Browne: Yes, and look for that early company in that sector that’s gone bust. Everybody goes, ‘Oh, it was just a bad business model', right? Everybody brushes it off. That’s a great sign.

Dave Baxter: Yep. OK. Very interesting. Thank you for your time. So, no bubble yet, but do keep an eye out on those metrics. Thank you for watching. Thank you for listening, and do catch up with us next Thursday. Take care.