Howard Marks, Man Who Predicted the Dot-Com Crash, Warns of Another Market Storm

Howard Marks, co-founder and co-chairman of Oaktree Capital Management, is sounding the alarm again. Known for predicting the infamous dot-com bubble 25 years ago, Marks is urging investors to tread carefully in today’s seemingly exuberant market.

In his latest paper, “On Bubble Watch,” Marks lays out cautionary signs that should not be ignored. From overoptimism and AI hype to an overreliance on tech giants and index investing biases, he outlines a landscape that feels eerily familiar.

The Signs of Over-Optimism

Howard Marks starts by pointing out a striking level of over-optimism in the market. He notes that since late 2022, the S&P 500’s valuations have soared, outpacing global peers. This kind of enthusiasm often signals trouble. History has shown that market exuberance tends to ignore underlying fundamentals, favoring dreams over data.

GTN / According to Marks, when optimism runs unchecked, investors are more likely to make reckless decisions. And that is what he calls ‘over-optimism.’

Marks emphasizes that this is not the first time we have seen such behavior. He compares today’s sentiment to the frenzy of the late 1990s, just before the dot-com bubble burst. Back then, investors were caught up in the promise of internet-driven growth, overlooking the risks.

Today, he warns, we may be making the same mistakes.

The AI Hype Is a Déjà Vu, Marks Says

Howard Marks also addresses the ongoing excitement around artificial intelligence (AI). While he acknowledges the transformative potential of AI, he warns that the hype might be spilling over into other tech sectors. This spillover, Marks argues, is inflating valuations to unsustainable levels.

In his words, “A bubble is more a state of mind than a quantitative calculation.”

This AI mania mirrors the dot-com bubble’s obsession with internet stocks. In both cases, investors seem drawn by the fear of missing out (FOMO) rather than rational assessments. Marks highlights that such enthusiasm often leads to poor decision-making and misplaced capital.

Over-Reliance on the ‘Magnificent Seven’

Another red flag, according to Howard Marks, is the market’s heavy reliance on the ‘Magnificent Seven’ – a group of tech giants driving much of the current growth. Companies like Microsoft, Apple, and Nvidia dominate headlines and portfolios. But this concentration poses risks.

He draws an important comparison to the 2000 bubble. Of the 20 most heavily represented companies in the index back then, only six remained in the top 20 by 2024. Among today’s ‘Magnificent Seven,’ only Microsoft has held its position for 25 years.

This should remind investors that even the strongest companies can fall out of favor as market dynamics shift.

The Index Investing Bias

The Talks / Marks points out that a market overly dependent on a few players is vulnerable to shocks.

Marks doesn’t shy away from critiquing the rise of index investing. While index funds have democratized investing, they come with unintended consequences. By design, they funnel money into companies based on their size, not their value. This, Marks argues, can inflate valuations and distort the market’s natural balance.

He calls this phenomenon “index investing bias.” In his view, it creates a feedback loop where popular stocks attract more capital, pushing prices higher without regard for intrinsic worth. During the dot-com bubble, similar dynamics played out, with investors piling into trendy tech stocks without a clear understanding of their fundamentals.

Marks cautions that we might be heading down the same path.

Lessons From the Dot-Com Bubble

Howard Marks knows a thing or two about bubbles. In January 2000, he published a memo titled “Bubble.com,” predicting the crash that would unfold later that year. His insights were rooted in the irrational behavior he observed in the market.

The aftermath of the dot-com bubble was brutal. Many companies went bankrupt, and investors suffered significant losses. Marks warns that today’s market shows similar signs of irrationality. However, he emphasizes that bubbles are not just about numbers. They are about psychology.

When fear of missing out eclipses careful analysis, trouble is never far behind.