The market can stay irrational longer

than you can stay solvent, but it can't

stay irrational forever, right? [snorts]

You are probably already aware of the

headlines that stocks are trading at

record values relative to the underlying

businesses they represent. Some of the

most valuable companies in the world

today will take hundreds of years to pay

back their investors, and those are just

amongst the ones that still bother

making a profit at all. The only way

this makes any sense is if the future

turns out to be some kind of uh

corporate utopia where our god-like AGI

lowers interest rates, doubles consumer

spending, and covers every square inch

of the planet and lower Earth orbit with

Nvidia GPUs. A slight exaggeration, but

only slightly. We have been told that

the market is effectively pricing in

perfection, which means if things don't

go perfectly well, we should be in for a

major correction, right? The only

problem is that we are currently in an

active oil war, our reserves are getting

dangerously low, inflation is already

coming back up, interest rates are

probably going to need to rise impacting

ballooning national and consumer debt,

all on top of two years of trade

uncertainty, questionable economic

results from one of the largest

investments in history, the potentially

systemic issues in financing vehicles

holding it all together, and then as a

little cherry on top, we decided to

throw another 50% tariff on Canada this

week because it worked out so well the

first 12 times. Now, I know none of

these are a surprise to any of you

watching anymore, but every single one

of these events can and will impact

companies' top-line revenue, operating

costs, and ongoing expenses. So, you

know, basically the entire income

statement. At the very least, this is a

pretty bumpy road towards that

supposedly perfect financial future, and

a lot of assets, even safety assets,

have naturally fallen based on these

headlines. Housing is down across broad

parts of the economy and the world, gold

has fallen by 25% from its all-time

high, and other speculative staples are

barely even worth mentioning. But the

stock market keeps on chugging. So, is

there something behind this endless boom

that makes the market immune to all of

these problems, or has it just not had

the time to look down yet?

>> The Dow Jones Industrial Average closed

above 50,000 for the first time ever on

Friday.

>> The US housing market is slowly dragging

itself into 2026. [music]

Earlier, mortgage rates hitting their

lowest levels since last October.

>> Have you been going on Zillow lately and

just seeing price cut after [music]

price cut? Well, it's pretty common.

>> Some record drops are is what we're

seeing in the metal space [music] as

that precious metal rally that we've

seen all year long. Gold is now down 5

and 1/2% on the month.

>> The Trump administration is praying that

the third time's the charm when it comes

to the president's tariff agenda.

>> White House has launched another

escalation of the trade war between the

US and Canada.

>> The Dow is over 50,000

right now.

>> Okay, so there is a logical temptation

to compare today's market to the dot-com

bubble of the late 1990s and the early

2000s. Both saw a significant market

rally fueled by speculation over new

technology, major infrastructure

investment, circular financial dealing,

all ultimately giving rise to companies

with questionable fundamentals. But that

comparison is probably a bit unfair to

the dot-com bubble. Back then, the

economy was in a much better position.

Debt across the board was lower, the

market was far less concentrated. There

was, at the time, less geopolitical

uncertainty, and outside of the dot-com

companies themselves, speculation was

actually pretty tempered. So, surely we

are overdue for a similarly massive

correction when we get to the end of

this particular fuse, right? Well,

maybe. And honestly, if it wasn't for

all of our livelihoods tied to this line

going up, there's a good reason to kind

of want these companies to be put back

in their place a little bit. But

assuming or even hoping that a crash is

inevitable can also tempt us into only

reading the information that reaffirms

what we already want to hear, rather

than challenging it. People have been

saying that the market is due for a

major correction since 2010. And so far,

they have been wrong. Being early has

also been expensive. The fund manager,

John Hussman, has been forecasting

[music] a collapse of 40% or more almost

every year since 2013. And well, over

that period, the market has spent that

entire time compounding at roughly 13%

per year. Had he actually put his money

where his mouth is, he would have wiped

out his fund several times over. Now,

obviously, this is all easy to say in

hindsight. But how is it possible that

we can still argue with a straight face

that all of this isn't overdue for a

correction? Well, a few reasons. The

first is the concentration risk.

Compared to something like the dot-com

bubble, the stock market is

significantly more concentrated now. In

2000, the top 10 companies in the S&P

500 accounted for roughly 10% of its

total market cap. Today, they account

for 40%. Now, that might sound like a

bad thing. It's a risk [music] that such

a large chunk of the stock market is

tied up in these companies. But it also

means that a large chunk of the market

is tied up in these very large

companies. As in, as opposed to hundreds

of new pre-profit listings that had a

much larger share of the overall market

back in the late '90s. Obviously, if one

of these failed, the overall impact on

the market would be devastating. But

they are much less likely to fail

because they all have a real market. The

top 10 generates around 30% of the

index's actual operating profits, which

was uh

not exactly the situation with the class

of 2000. After the dot-com bubble burst,

the market leaders all lost value. But

their overall share of market value

actually increased as hundreds of

companies eventually got acquired,

delisted, or went bankrupt. The number

of listed companies in America peaked at

more than 8,000 in the late '90s. And

over the next decade and a half, roughly

half of them disappeared. The

concentration in the market today is

probably not a great thing for society.

But for investors, it might not really

be as bad as it might look. We might

have put our eggs all in just seven big

baskets. But those baskets are far more

secure and well-constructed than the

hundreds of packing peanuts that made up

the market in the dot-com era. Now,

let's assume, hypothetically, AI

completely flops tomorrow. Take a

worst-case scenario where there is

definitive proof that we will never

reach AGI, and on the same day China

releases another deep seek style

open-source model that beats the leading

American models and can run on a laptop,

completely negating the need for those

data centers. Well, even in that kind of

extreme case, all of the Magnificent

Seven would still make money. Only

Nvidia has a really significant share of

its business tied directly to selling

the technology itself. Last quarter, 75

of its $81 billion in revenue came from

data center hardware. Their financials

don't report it in detail, but from the

best available sources we could find,

the remaining 6 billion came directly

from selling a single 5090 at market

prices. So, well, yeah, they would

probably take a hit if the AI investment

cycle stopped, but the rest of these

companies still make their actual money

by selling ads, cloud subscriptions,

iPhones, and the big promise of enhanced

cruise control. The point is, for all of

these companies, AI is mostly an

expense. If anything, a total

abandonment of AI tomorrow would

actually improve their earnings. Less

money going towards data center

build-outs, crazy salary packages, and

infrastructure depreciation means they

could go back to being asset-like cash

flow monster doing big stock buybacks

every quarter, you know, like the good

old days. And yeah, with some outliers,

most of these mega-cap companies aren't

actually that stretched in terms of

historic valuation. And that's again

based on earnings tied down by

significant AI expenses. Despite what

simple visuals like this and this might

suggest, there are still large voices in

the finance space that actually consider

these companies to be cheap. And again,

even if you don't personally think this

makes sense, the market doesn't really

care what you think. But that also

doesn't mean that this can go on

forever. So, it's time to learn how many

works to find out how long the rest of

the market can ignore reality. P/E

ratios are stretched, earnings growth

isn't keeping up with prices, and

there's no shortage of reasons for

investors to be nervous. And yet, the

market just keeps climbing anyway, which

raises the obvious question. Is this

actually fine, or are we all just

choosing not to look too closely? The

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the kind of disconnect you completely

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multiple valuation models, discounted

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Okay. So, regardless of whether this is

an AI boom or bubble, these companies

are probably less exposed than the

overall economy is. If that technology

pays off, great. These companies get to

sell high-priced software subscriptions

and girlfriend bots as a service, all

ultimately expanding the revenue and

bottom line. If it doesn't, well, maybe

that's also great, and these companies

can get back to business as usual,

cutting out AI expenses and growing

their bottom line. Now, of course, these

aren't the only companies in the market.

And all of the mega IPOs that were

slated for this year don't have the same

foundation of real revenue underneath

them. but two-thirds of them aren't on

the market yet. And the one that is on

the market is already repricing itself,

which is thoughtful, I suppose. The

point is the market is apparently still

perfectly capable of repricing

something. It just hasn't felt the need

to reprice everything. There are certain

corners of the finance space that

genuinely consider the current roster of

the Mag 7 to be cheap. Usually, the

biggest companies in the market trade at

a significant price to earnings premium

over everybody else. This is because

bigger companies are usually more

diversified, they have more brand

awareness, and well, they got that

valuable for a reason, usually by

dominating their particular market. For

most of the last half century, that

premium was between 50% and 100%. In

plain English, people will generally pay

at least 50% more for Google shares,

even if they were representing the same

earnings as a broad selection of smaller

tech or advertising-based companies.

Today, the Mag 7 still trades at a

higher price to earnings ratio than the

other 493 companies in the index, but

the premium has shrunk to around 10%.

The thinnest it has been in more than a

decade. And if you exclude Tesla, the

gap gets even smaller still. Now, that

shrinkage has mostly come from these

companies just making a whole lot more

money. Mag 7 profits grew 63% in the

first quarter of this year, while the

other 493 companies grew about 17%. And

since they collectively make up such a

large share of the market, that would

make it very hard for the whole thing to

fall too far, right? Well, good value

compared to the rest of an extremely

expensive market. So, yeah. Cheap is a

relative term, but markets mostly run on

relative terms. And the problem for a

lot of these investors is that the

alternative to buying one stock is

usually just buying a different stock.

And statistically, these companies have

outgrown the economy that produced them.

Theoretically, the stock market depends

on the overall performance of the

economy because companies are

participants in that economy. No matter

how revolutionary its products are, a

company that can only operate within the

city limits of Ardmore, Oklahoma, is

naturally limited in how much it can

grow. America, fortunately, has a very

big economy, but we have even bigger

companies. For most of our recent

history, public companies had a

collective market cap of around 50% to

100% of the country's annual economic

output, meaning that the value of all

the listed companies in America were

worth about as much as America's total

annual GDP. Again, this makes sense

since the revenue and by extension their

profits and ultimately valuations are

part of that gross domestic production.

Today, the total value of American

public companies is currently sitting

around 234% of GDP, beating the previous

ratio record set in 1999. Yeah, at the

height of the dot-com bubble. Warren

Buffett once described a version of this

ratio as probably the best single

measure of where valuations stand. And

on that measure, the current market

makes 1999 look responsible. So, not a

great sign, right? Well, a lot of people

are actually arguing the opposite. More

than at any other time before, our

companies are global. They reach across

the planet for their customers and

increasingly for their investors, too.

When a company's revenue comes from

everywhere, a local disruption, a tariff

here, a housing slump there, doesn't

really matter as much as it did when

American companies overwhelmingly sold

things to Americans. The relative weight

of these companies in our economy also,

somewhat perversely, highlights the

bulls' last major defense. If current

stockholders sold their shares, what

would they actually do with that money?

The largest group that owns the vast

majority of these assets are ultimately

wealthy people with more money than they

need.

>> Say the line, Bart.

>> According to the Fed's own numbers, the

top 10% of American households own about

87% of all the corporate equities and

mutual fund shares in the country. The

bottom half owns 1.1%.

>> Yay!

>> So, the decision to sell or not sell

belongs to a fairly small group of very

comfortable people who have other ways

to access liquidity if they need it and

nowhere else better to invest it in the

meantime. If a wealthy holder needs cash

these days, the standard move is to

borrow against the portfolio and keep

the shares. Investors are currently

carrying a record $1.42 trillion in

margin loans, according to the

industry's own regulator. Morgan Stanley

CFO Sharon Yeshaya spent parts of a

recent earnings call pointing out that

80% of their client households now

borrow against their accounts, up from

14% 5 years ago, with lending balances

at $186 billion and climbing. And for

the few who actually might want out, the

alternatives are not exactly making the

case. Bonds finally pay decent interest,

if you trust that rates are done rising,

while roughly half of the Fed's own

committee is openly talking about hikes.

Housing has been falling in real terms

for 11 straight months, and falling

outright in a growing list of cities.

Gold was supposed to be the responsible

adult in the room, and you already know

how that's going. And Bitcoin is

currently worth about half of what it

was in October of last year. A symptom

of having so much financial wealth tied

up amongst such a small group is that

unlike regular people who might need to

sell their assets to cover over

shortfalls in other parts of their

financial lives, that doesn't really

happen with people at this level. So,

the only reason they would need to sell

is if a better investment opportunity

came along. And at the moment, there

aren't any. Now, we have spent a lot of

time in this video looking at how much

money the collective stock market is

worth, but nobody ever stops to ask how

much stock market the collective money

is worth. The total US stock market is

currently priced at around $74 trillion.

The M2 money supply, which is basically

every physical dollar, checking account,

and savings balance in the country is

about 22.7 trillion. Asset prices have

obviously climbed bigly since the

stimulus measures kicking off in 2020,

and that has largely been attributed to

a lot of money trickling up to people

who simply invested it. But, even with

all of that extra money acting as a

denominator down here, the market is

still seeing a higher share of it than

almost any time before. Last year, the

total value of the stock market crossed

three times the amount of actual money

in circulation, and it has kept drifting

higher since. Today the ratio sits

around 3.3. The only time this ratio has

ever been anywhere close was the run-up

to the dot-com bubble. Now that's not a

great sign, but again the argument today

is that these companies have just

outgrown their host economy and compared

to the money in the global economy their

value still looks relatively modest, at

least compared to that other bubble. But

we should also probably address the

curious case of South Korea. The KOSPI

roughly doubled in 6 months powered by

two chip companies, Samsung and SK

Hynix, that between them make up about

half of the entire index. These are real

companies making real profits with real

customers all over the world, well

beyond the confines of their home

economy. But even still over about three

and a half weeks their market still fell

25% complete with repeated emergency

trading halts and about 1.7 billion

dollars in forced liquidations. For what

it's worth, as of this week the market

has bounced back above 7,000 with city

already calling the whole episode uh a

technical correction and a potential

buying opportunity. Now my good friend

Patrick Boyle recently made a whole

video about what's going on over there,

so I will leave a link to his extensive

breakdown if you are interested. But the

point is that the market is not

infallible, it's just smarter than you

are. This video more than any other has

a potential to age horribly, but it is

worth acknowledging that you are not

seeing something that the collective

wisdom of the market has missed by

pointing out that this all looks a

little bit like a bubble. It knows. It's

just that the people with more voting

power like the other arguments a little

more for now.

So in the meantime it's worth at least

understanding what those arguments are.

But if you want a counter argument, we

have compiled all of the problems into a

rather extensive video over on our

compilations channel. So go and check

that out next and don't forget to like

and subscribe to keep on learning how

money works.