It’s one event after another in our world. As I wrote this piece, the Israel-Iran war managed to flare up, and then pause again. And the markets are reacting - not just the stock market, but the bond market as well.
On Friday (June 5), something happened on Wall Street. US Treasury bonds fell sharply following the release of the employment report, which indicated that the US labor market was strong. The report provoked fears that inflation would rise, and bond prices responded accordingly. Their fall brought in chain a sharp fall on US stock markets, although there were additional reasons for that.
The first quarter reporting season for US companies is coming to an end. On the whole, company reports have been excellent, particularly those of the technology giants, showing a substantial improvement in profitability. This apparently justified a continuation of the rally in share prices, despite the distance they have already come.
There is however one main obstacle to that: the decline in US Treasury bond prices that have brought them to yields to redemption not seen for many years: 4.58% for ten-year bonds and 5.05% for 30-year bonds. That is of course a bright warning light for the stock market.
It is therefore no surprise that warnings from the lions of Wall Street were not slow in coming.
Ed Yardeni, for example, a highly-respected veteran investment strategist, pointed to the fact that the US was not alone, and that what was happening to US government bonds was also happening in Europe and Japan, in a way that was liable to give rise to competition over where the money would go.
He also warned against a relaxation of policy by the US Federal reserve under new chairperson Kevin Warsh, which would be liable to cause him to be late in dealing with inflation.
US-based investor and fund manager Jeffrey Gundlach sees real danger of a rise in interest rates, and therefore recommends keeping a high proportion of the portfolio, 20%, in cash, alongside investment in commodities and gold.
Hedge fund manager Michael Burry, known for having predicted and profited from the 2008 sub-prime crisis, has been warning for a year and a half that technology stocks are very high, soaring on the AI euphoria, and finds parallels with the Internet euphoria of the dot.com bubble that burst in 2000.
Respected investor Ray Dalio, founder of the Bridgewater hedge fund, shares the view that stocks are high, but not to the extent of being a bubble.
Michael Hartnett, managing director and chief investment strategist at BofA Merrill Lynch Global Research, claims that the stock market is extremely overbought. Investors may have become $4 trillion richer since the beginning of the year, but they have no cash left with which to buy. The market has spiked in what is known as a melt-up, that is on the basis of emotions and the fear of missing out, rather than for solid economic reasons. An index developed by Bank of America measuring the ratio of bull to bear stocks is at a peak, reflecting a complete consensus that the markets will continue to rise. In short, all the signs are there of an imminent deep correction, and Hartnett therefore recommends that investors should flee the market while they can, citing the old adage "sell in May and go away."
And Buffett? After retiring from the management of Berkshire Hathaway, he left his successor with a portfolio swollen with cash, saying that he was unable to find stocks worth investing in at today’s prices.
Of course there are also optimistic forecasters who believe that the rally will continue, such as portfolio manager Cathie Wood.
Stock market metrics at a peak
The level of share prices in the US is generally measured by three metrics. There is the Buffett Indicator, which analyses the ratio between the total market cap of companies in a country and that country’s GDP. When the ratio approaches 200% or even higher, that is dangerous. The ratio for the US currently stands at 250%.
The second metric is the Shiller PE Ratio of Nobel prizewinning economist Robert Shiller. This is calculated by dividing a market’s current price by the average of the companies’ inflation-adjusted earnings over the previous ten years. There is logic to this model, but it also has a flaw in that it does not entirely capture high-tech companies with very rapidly growing profits.
According to this metric, the historical average p/e ratio of the US markets is 17; today it stands at 42, almost an all-time high. The two previous occasions on which the ratio was at this kind of level were on the eve of the dot.com crash of 2000, and more recently on the eve of the sharp falls on the US market in 2022.
The third metric, which may be the most relevant one, is the Fed Model. It compares stock market prices with bond prices.
The twelve-month forward earnings yield (earnings divided by price) of the stocks in the S&P 500 Index is 21, while the equivalent yield on US Treasury bonds is 20.
Since US government bonds are considered to be a risk-free asset (despite the US government’s massive debt), one would expect the stock ratio to be lower than the bond ratio, but that is not the case.
Explosions in the Gulf make waves on Wall Street
How have we reached this situation? As far as stocks are concerned, the rally, as mentioned, rested on substantially improved company profits, and the euphoria of private investors motivated by a natural desire to gain from situations like this, as well as by the gnawing fear of missing out if they don’t rush to invest.
As far as Treasury bonds are concerned, the main reason for the sharp fall since the start of the current round of fighting with Iran is the fallout from that conflict. It has caused a rise in the price of oil and its many derivatives, supply chains have been disrupted, including of fertilizers, causing a rise in prices of agricultural commodities and food, while microchips are suffering from a shortage of supply and soaring prices, sending the share prices of companies that make and inspect them higher.
The obvious result is a rise in the rate of inflation. Three months ago, the markets signaled that interest rates around the world were about to fall, but today they are signaling possible rises, in the US, Europe, and elsewhere. In some cases it’s not just a possibility but a fact, such as in Norway and Australia.
The key question is how long the supply chain disruption will last. The longer it goes on, the greater the damage will be.
New investors rock the market
So are we looking at a bubble developing or not? My answer is no, there’s no bubble.
True, there are signs on the market characteristic of a bubble, particularly the behavior of private investors motivated by fear of missing out on the rises, while there’s a broad consensus that the rises will continue, and there are many IPOs being snapped up by investors. And yet, it’s not a bubble at this stage.
Share prices are high, but not divorced from reality. A downward correction of 15-20% is certainly in order, but not a real crash.
At the same time, it has to be taken into account that a bull market can overshoot, especially as hordes of investors who have never tasted a mini-crash have recently come into the market, and they could turn a mini-crash into a major crash with their own hands.
Zvi Stepak is a co-founder and shareholder of Meitav Investment House.
This article should not be regarded as a recommendation or as a substitute for the independent judgement of the reader, or an invitation to make a purchase or investment or any transaction or deal. The information may contain errors, and market changes are liable to occur.
Published by Globes, Israel business news - en.globes.co.il - on June 10, 2026.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2026.