Billionaire investor Ray Dalio doesn't think the stock market is in a 'full-on bubble'

• Bridgewater founder Ray Dalio said the stock market doesn't resemble a "full-on" bubble right now.
• He acknowledged that the Magnificent Seven names look "a bit frothy."
• "[O]ne could still imagine a significant correction in these names if generative AI does not live up to the priced-in impact."

Bridgewater founder Ray Dalio says he doesn't think the stock market resembles a bubble.

In a new note, the legendary hedge fund investor said despite the recent euphoria and rallies in the market, the landscape does not entirely meet his criteria for what constitutes a bubble. Among the factors he looks for are high prices relative to value, signs of unsustainable growth, naïve buyers piling in and speculating, and a large share of purchases financed by debt.

"When I look at the US stock market using these criteria it — and even some of the parts that have rallied the most and gotten media attention — doesn't look very bubbly," Dalio wrote.

The S&P 500 has notched a string of records in 2024, and it's gained more than 8% year-to-date.

The Magnificent Seven stocks — Apple, Amazon, Tesla, Nvidia, Microsoft, Alphabet, and Meta — are still in the spotlight, though there has been some argument from Wall Street pros that the group should be broken up, especially as Tesla stock has tanked this year and as Apple stumbles.

Dalio acknowledged that this batch of stocks has fueled market-wide gains, and the market cap for the group has increased more than 80% since January 2023.

"The Mag-7 is measured to be a bit frothy but not in a full-on bubble," Dalio maintained. "Valuations are slightly expensive given current and projected earnings, sentiment is bullish but doesn't look excessively so, and we do not see excessive leverage or a flood of new and naïve buyers."

To his point, Bank of America's recent fund manager survey showed investors haven't been this bullish in two years. A client sentiment report from Charles Schwab showed similar enthusiasm for the first quarter of 2024.

Downside risks remain, however.

"That said, one could still imagine a significant correction in these names if generative AI does not live up to the priced-in impact," Dalio said.

In any case, historical trends may confirm Dalio's assessment that stocks aren't in bubble territory.

In a note last week, DataTrek Research cofounders Nicholas Colas and Jessica Rabe pointed to the S&P 500's 31% three-year gain on a price return basis, which is squarely below the typical returns indicative of a bubble forming ahead of a crash.

"We are nowhere near that level now, which says investor confidence has not reached an unhealthy maximum," the researchers said. "This does not guarantee further gains, but we can safely take 'bubble risk' off the list of stock market concerns."