The Chiefs beat the 49ers in the Super Bowl, the stock market is trading at fresh-all time highs, and meme stocks are on a rocket ship to the moon as the internet desperately parses messages from “Roaring Kitty” a.k.a. Keith Gill.
No, you didn’t bump your head and wake up back in January 2021, but you’d be forgiven for thinking that was the case.
You’ve probably heard that history doesn’t repeat itself but it often rhymes. And with companies like GameStop (GME) and AMC (AMC) back in the zeitgeist, it’s fair to wonder if this this eerily similar setup is an ill omen for the bull market.
To find an answer, let’s compare the two environments surrounding the meme stock frenzies – then and now.
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 19 months into a new bull market, but only seven and a half months since a significant October 2023 bottom. During that time, the S&P is up about 33% and is trading at a P/E ratio of about 28 – 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 time around. 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.
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 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.
