Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 650

If people talk about a bubble, it’s unlikely to crash soon

We have had our fair share of bubble talk in the AI space over the last six months. So many people argue that AI stocks are in a bubble and that bubble may lead to a crash soon. But while we can debate the former, I think the latter is the wrong conclusion.

It is extremely hard, if not impossible, to identify a bubble in real time. Still, even if you can identify a bubble with certainty, you shouldn’t expect the affected stocks to see a drastic decline in prices anytime soon. That is one of the lessons I take away from reading a new paper by Christian Stolborg and Robin Greenwood.

They looked at all the boom-bust stocks in the US since 1980. Boom-bust stocks meet the following criteria: (i) they have had >100% return in the last 12 months and the last 6 months, (ii) a positive return in the current month, (iii) a price-to-book or a price-to-sales ratio of more than 5x, and (iv) a drawdown of at least 50% in the next 24 months.

As you can see in the chart below, there have been quite a few of these boom-bust stocks, not just in 2000 but throughout the period from 1980 to 2023 covered in the study.

Figure 1: Boom-bust stocks since 1980

Source: Stolborg and Greenwood (2025)

In hindsight, we can identify these stocks and know precisely when their share prices peaked. But when did they crash? The second chart today shows that it can take more than a year before even these extreme bubble stocks face a significant drawdown. About 75% of bubble stocks are down by 50% within a year after they have reached their peak, but 25% of stocks continue to drift along for more than a year before they crash.

And because boom stocks are defined as having at least 100% return in the six months before they peak, a 50% drawdown only means that investors have lost six months’ worth of gains by then. Often, the drawdowns continue from there until most of the gains from the bubble phase are lost again.

Figure 2: Months until boom stocks meet the bust criteria of 50% drawdown

Source: Stolborg and Greenwood (2025)

So even if you know you are in a bubble, share prices can linger near the bubble peak for quite some time. But do people at least talk about the stocks being in a bubble during that time? It turns out no. There are two types of media coverage of boom-bust stocks, as exemplified by Gamestop in 2021 and Yahoo in 1999. Gamestop was immediately identified as a bubble stock, and the media talked a lot about the bubble in Gamestop as it unfolded and before the stock crashed. But this is the exception rather than the rule.

According to the authors of the study, most media coverage resembles that of Yahoo in 1999 much more closely. The media coverage of a potential bubble in Yahoo intensified about one year before the shares actually hit their all-time high and then collapsed. Once the bubble actually burst, the share of media articles covering Yahoo as a bubble stock was about half of that in 1997 and 1998. Only when the crash had fully unfolded in 2003 did the media characterise Yahoo shares again as a bubble stock because by then, it was clear to everyone that the shares had gone through a boom-and-bust cycle.

Figure 3: Gamestop 2021 vs. Yahoo 1999

Source: Stolborg and Greenwood (2025)

The lessons I learn from the paper are that it is (i) incredibly difficult to identify a bubble in real time, (ii) you cannot trust media or investor worries about a potential bubble as a signal to identify crash risk, (iii) even if you are in a bubble, many stocks can linger for a long time near their all-time highs giving investors hope and short-sellers seemingly endless pain before the share price collapses.

But just to be sure that you don’t blame me for being a booster to AI stocks. Even though the media typically misses a bubble, it sometimes catches it in time. Maybe AI stocks follow the path of Gamestop, perhaps they follow the path of Yahoo. I don’t know. We will find out in due course.

There are some other interesting results in the paper about which metrics to use to get some indication that a stock may be in a bubble, but I leave you to read the paper and find out about them yourself.

 

Joachim Klement is an investment strategist based in London. This article contains the opinion of the author. As such, it should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of the author’s employer. Republished with permission from Klement on Investing.

 

  •   18 February 2026
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Have AI’s four horsemen arrived?

Dotcom on steroids Part II

The wisdom of buying absurdly expensive stocks (or not!)

banner

Most viewed in recent weeks

Testamentary trusts post-budget: Estate planning, tax reform and the ‘death tax’ debate

Proposed Budget changes to taxation are casting new uncertainty over testamentary trusts, prompting closer scrutiny of estate planning structures and the real implications of reforms still taking shape.

How to minimise tax with a will

Inheritance tax implications in Australia may surprise some, as poor estate planning without proper wills or trusts can lead to costly tax bills and delays for beneficiaries.

Meg on SMSFs: The CGT changes don’t impact super but what about Div 296 tax decisions?

New CGT rules could tip the scales in the super vs non-super debate. For those facing the Division 296 tax, the case for withdrawing has gotten more complex. A "comparison rate" tool may help assess decisions.

High quality businesses are on sale

Beneath the dominance of the ASX's largest stocks, much of the market has been left behind. High-quality companies are now trading at levels rarely seen, offering opportunities for investors willing to look deeper.

The strange effect of the 30% minimum capital gains tax

The 30% minimum tax on capital gains sits at the heart of the budget's proposed reforms. Yet the mechanics reveal anomalies that introduce unexpected distortions that raise questions about its design.

Welcome to Firstlinks Edition 667 with weekend update

The downfall of the giant and three lessons for investors.

  • 18 June 2026

Latest Updates

Latest from Morningstar

Ranking three common retirement strategies

The defining challenge of retirement isn't just about building wealth, it's about converting your lifetime savings into sustainable income. A holistic understanding of different strategies can improve long-term outcomes.

Economy

Was life really better in the good old days?

Are we worse off than previous generations? Lately, there seems to be a heightened level of angst that economic conditions are getting harder and that the two-party political system (and maybe democracy too) is failing voters.

Retirement

Australia has saved $4.5 trillion for retirement. Here's what matters more

Most Australians approaching retirement can tell you the exact dollar value of their super account. But success depends on more than a sizeable balance. Here's four key questions to ask yourself at the start of the financial year. 

Who gains in an AI-supercharged economy?

AI is already reshaping the economy, but companies building transformative technologies rarely capture the greatest long-term value. Instead, those benefits accrue to the users. We may well see this pattern reproduced. 

Taxation

Div 296's million-dollar reset worth $25,000

The 'cost base reset' for the new super tax is being sold as protection for pre-July gains. A worked example shows $1M of protection is worth about $25,000, and the real deadline has not passed.

Latest from Morningstar

The forecasting fix that Wall Street missed

Asking whether markets are overpriced may be the wrong question. New research suggests that traditional valuation metrics used to forecast returns may have been misread. Here are five takeaways for investors.

Investment strategies

Should a fund manager invest their own money differently?

Investors often like the idea that fund managers should invest client money exactly as they invest their own. But reality is more complicated. Unique circumstances make a different approach rational and, at times, beneficial.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.