T. Rowe Price's 5 bubble-spotting metrics and the stocks they're backing now

Back in November, T. Rowe Price’s Global Equities Portfolio Manager Scott Berg was already calling a stock market bubble, but cautioned investors about selling just yet.

As he said back then, "I don’t think the bubble’s going to pop imminently." Such pronouncements are always at risk of aging like milk. But three months on, it’s a prediction that’s still holding up. 

The S&P 500 and ASX 200 are both around record highs, even as investors continue to grapple with a rapidly-changing world and the profound and far-reaching implications of AI.

In a webinar this week, T. Rowe’s Global Equities Associate Portfolio Manager Iona Dent shared how the manager is thinking about bubble concerns and AI, and the key upshots for investors.

“Our view is that the AI cycle is maturing and not peaking,” she said. “We’ve moved from hype to real-world impact and disruption and when dispersion rises, stock selection matters more than passive exposure.”

“In the world of AI, the gap between winners and losers is increasing.”

But anyone channelling Chicken Little and declaring "the end is nigh" could be putting the cart before the horse. 

To push this laboured animal analogy even further, the aim for investors is making sure they've backed the right horse when the chickens do finally come home to roost. 

On bubble watch

As Scott Berg stressed back in November, there’s plenty of compelling evidence that the tech-led stock market is currently in a bubble.

But Dent believes we’re still midway through a broader bull run, not the end of the run. In Dot-com bubble terms, we’re in 1998, not 2000. 

While the warning signs are there, only one of T. Rowe Price’s five key bubble watch metrics is currently flashing red, geopolitics.

The US economy, including rates movements and employment, are still fairly robust, and the AI supercycle is showing no signs of slowing down just yet.

In fact, geopolitics remains the biggest risk in T. Rowe’s framework, with growing leverage in the market also something on their risk radar. 

Of course, this doesn't mean it's all entirely smooth sailing. 

Dent uses the analogy of the recent snowstorm in New York. If she looks out her window everything looks calm and peaceful, but under the surface quite a bit of damage has been done.

Software stocks are the most obvious victim, where "the market is shooting first and asking questions later", according to Dent. 

But sector-level volatility and divergence is also a sign in favour of us not being in a genuine stock market bubble. If we were truly in the latter stages of a bubble, you’d generally expect all sectors to be at highly-elevated valuations, which so far hasn't materialised.

The stocks and sectors they're backing 

A diverging stock market calls for careful stock selection, says Dent, and the key is separating the companies with strong real-world metrics, whether or not they're part of the AI upheaval.  

"We're still feeling constructive on companies where we see real earnings, cash flows and real demand."

One sector of note is the chip providers, where Dent points out that the PEG ratio of TSMC, Nvidia and AMD all remain below 1x.

"The Mag 7 is more nuanced," says Dent. "We feel good on Alphabet, Nvidia and Microsoft where AI is accelerating their core businesses. This is less true for the likes of Amazon, where the retail business is seeing some obstruction risk from the likes of Walmart, who are becoming big players online and in e-commerce."

On software stocks, T. Rowe says the pricing has been indiscriminate, and they're seeing select opportunities in companies that control critical data, sit very deep in enterprise workflows or have a clear regulatory moat. 

They're bearish on the tech stocks that have run particularly hot, especially those where earnings-based valuations are pushing the limits of credulity. 

This includes Tesla, as well as Palantir, which is one of only 7 stocks that has traded at 100x revenue. History suggests that doesn't end well. 

On a sector level, they're still overweight tech and overweight financials, and underweight consumer discretionary and staples, healthcare and energy.

On a region level, they're overweight emerging markets and underweight Europe and the US. 

"We're pretty excited about the environment [in EM] right now. We have a weak dollar and a declining US rates environment, which tends to be good for relative outperformance in emerging markets.

They're running what Dent calls "something of a barbell strategy", and have flagged Vietnam, India, Indonesia, the Phillipines and Argentina as emerging markets that have lagged in 2025 and could see a reversion to mean thanks to favourable demographics and supply chain significance. 

So while investors can potentially rest easy on bubble worries - for now - they need to keep their eyes on the prize all the same. As Scott Berg puts it, we're only in the second half of the second quarter of the Superbowl. 

By way of local analogy, Dent says we're not even halfway through the race at the Melbourne Cup. They're not handing out the medals just yet. It's where you finish that matters. 

"The key is staying in the race and making your move when the time is right." 

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T. Rowe Price Global Equity Fund I

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