The stock market bubble has burst and investors betting on a rally are in denial, investment manager says

• The speculative era in stocks is over, and investors are in denial over the burst of the pandemic stock market bubble, Richard Bernstein Advisors said.
• The investment firm said liquidity in the market was shrinking faster than in 2000 and 2008, when the dot-com and the housing bubbles burst.

The bubble in stocks has burst, and investors who are betting on a rally in the market are still in denial over the changing economy, according to Richard Bernstein Advisors.

"The stock market rally so far this year seems based largely on speculation rather than fundamentals," the investment management firm said note on Monday. "Investors appear hopeful the Federal Reserve will soon return to a policy of cheap and abundant liquidity while ignoring the Fed's repeated warnings to the contrary."

The note warned that the liquidity bubble in tech, crypto, and other speculative assets had already burst, as central bankers are pulling back from the liquidity injections that allowed the market to rise to dizzying heights during the pandemic.

The S&P 500 plunged 20% last year amid Fed rate hikes and quantitative tightening aimed at lowering inflation. The drawback in liquidity is even more drastic than what was seen in 2000 and 2008, RBA said, which led to the dot-com and housing bubble busts that roiled markets over a decade ago.

And while stocks began the new year with a strong rally, it is fading as Fed officials have warned more rate hikes are needed to truly tame inflation.

"The speculative rally so far this year seems a perfect example of investors' denial of a changing economy," RBA warned.

The firm added it was more bearish in speculative sectors like tech and crypto, than in areas such as energy and industrials – embodying a shift in the market from "cute weiner dogs in the metaverse" to "real productive assets."

That's in line with other Wall Street analysts, who note that the "old economy" will flourish in the new economic regime, as interest rates are set to remain high.