There are 2 signs that stock market euphoria is mirroring past bubbles and could end badly for investors

• The stock market is going through a "euphoria" episode that will end badly, according to Smead Capital.
• The investment advisor pointed to similarities between the current market and previous bubbles.

The stock market is going through a "euphoria" that could end badly for equity investors, according to investment advisor Smead Capital.

"In our conversations with investors, we are pointing out the 'totality' of this financial euphoria episode. Due to incredibly low interest rates for a long time, we think the history books will look back at this time period as a combination of the 1636 Tulip Mania in Amsterdam and the South Sea Bubble of 1720," the firm said in an shareholder letter on Monday.

According to Smead, the tulip boom and bust mirrors the market's excitement in crypto, meme stocks, IPOs, and SPACs, which soared in 2020 and 2021 then plunged in 2022 as interest rates climbed.

And the collapse of the South Seas Company mirrors the current trajectory of certain tech stocks, which have boomed this year on Wall Street's excitement for AI, Smead added.

Stocks have performed fairly well in 2023, with the S&P 500 up nearly 15% year to date. But the trend is likely soon to end, as the forces boosting the market fade, the firm said.

In 2009, the firm correctly predicted the secular bull market over the following decade, citing 10 bullish factors.

"Where are we today on those ingredients? To say we are at or nearly at the opposite extreme would be an understatement," Smead said. "We believe this euphoria episode will end badly, but some part of capital tied up in the episode will work its way into whatever investors gravitate toward in the future."

That means good investment opportunities could lie in oil and energy stocks, which could benefit from a new "commodities supercycle" as chronic underinvestment in the industry strains supply and pushes up prices.

There will also be opportunities in large-cap stocks for industries that benefit from the dominance of millennials, Smead said, given that there are more 40% more millennials between the ages of 27-42 than Gen Xers within that age range.

Other Wall Street commentators have warned of more downside ahead for equities as interest rates stay higher-f0r-longer. Yale's US Crash Confidence Index indicates that only 32% of individual investors think the chance of a 1987-style stock-market crash over the next six months is less than 10%.