The market is at all-time highs, the Chiefs beat the 49ers in the most recent Super Bowl, and so-called meme stocks are headed to the moon. Is it January 2021 all over again? Sure feels like it.
Yes, GameStop (GME), AMC Entertainment (AMC) and the like are back, with those and a few others nearly tripling this week. The last time that happened, things didn’t end so well for the meme stocks. Or the market. Should it be a similar red flag for the bull market this time around?
To find an answer, let’s compare the two environments surrounding the meme stock frenzies – then and now.
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In January 2021, the market was 10 months into its post-Covid crash rally, which began in earnest after the March 2020 bottom. During that time, the S&P 500 shot up about 63% and its price-to-earnings ratio spiked to around 36, its loftiest valuation in more than a decade. Things were quite frothy, as thanks to Covid, people had little else to do in the winter of 2020/2021 but stay at home and invest their government-issued stimulus money on the promise of the coming economic recovery.
Fast forward to today. Stocks are technically about 18 months into a new bull market, but only six and a half months since a significant October 2023 bottom. During that time, the S&P is up about 27% and is trading at a P/E ratio of about 27 – its highest valuation since May 2021, though well off its December 2020/January 2021 peak.
That qualifies as frothy. After all, the median P/E ratio for the S&P historically is 15. But that’s over the course of 150 years. The valuation hasn’t been as low as 15 since 2012 and has been north of 20 for the last nine years. As I’ve mentioned, this is a growth investing environment and has been for basically the last decade-plus.
Still, even by those standards, share prices are a bit “out over their skis.” But I don’t think it’s nearly the kind of unchecked froth we saw in early 2021, and this meme stock rally is nothing like that one – so far. For starters, flows into names like GME, AMC and other meme stocks in 2021 were four times what they have been this week. Also, the returns, while impressive, don’t compare to what was happening in January 2021, when GME went from 4 to 81 in a matter of three weeks, and AMC went from 21 to 592(!) in five months.
Those kinds of meme explosions could still happen, of course. But this time, Wall Street is prepared for these kinds of retail investor-driven short squeezes. And indeed, as I write this, some air is coming out of the balloon already, as both GME and AMC are down significantly from their peak earlier this week.
That doesn’t mean another market pullback won’t soon follow. The benchmark stock index is still the most overinflated it’s been, at least on a P/E basis, in three years. Some more selling would make sense until valuations are more in check.
But I also don’t think this latest meme stock mini-rally spells doom for the market in the longer term, the way it did in early 2021. A bear market followed in 2022 and early 2023, and I don’t expect another bear market to emerge this soon into the new bull rally; you have to go back more than four decades to find a bull market that up and fizzled within its first two years, and this one didn’t even really get going until last November.
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