History is littered with financial ‘bubbles’. What lessons can we learn from past crashes, and are there any asset classes today that warrant close scrutiny for signs of excess?
There is always something to cause concern in financial markets. Volatility and uncertainty are the price we pay for potential growth. But every so often, growth in a particular asset class, industry or geography, accelerates to such a degree that investors ask: how far can this go, and is this a bubble?
Despite the volume of academic papers written on the subject, there is no single conclusive definition of a financial bubble. At Sarasin, we think of bubbles as periods of strong and accelerating price gains, driven by momentum, often linked to a powerful “new narrative” (such as a technological or policy shift). This can culminate in an eventual reversal that causes a material financial loss. To quote the late Sir John Templeton, the four most dangerous words in investing are: “this time it’s different”.
The benefit of hindsight
An important point: our view is that a financial bubble is not truly a bubble unless it ‘pops’. Otherwise, it is simply a period of strong growth. This means that bubbles can only really be confirmed after the event, which is why identifying them in real time is so difficult.
Investments can appear to be either extreme speculation or the infancy of something genuinely transformative. Consider the early days of cloud computing and digital platforms in the mid-2000s through to the mid-2010s, when many feared these developments looked bubblelike.
In hindsight, this was not a bubble as it did not ‘pop’. In other words, significant financial losses did not materialise and much of this technology became the infrastructure on which modern businesses are built.
Bubbles occur regularly but not all are created equal. Some destroy value for participants but with contained consequences; others are systemically destructive; and some usher in new eras of opportunity through the infrastructure they leave behind. Many of the most important advancements in modern history have emerged because of bubbles, not in spite of them. The exciting narratives that often accompany financial bubbles can in fact be powerful magnets for capital deployment.
A good example is the railway mania of the 1840s in the UK. While this bubble eventually burst due to speculative investment in unprofitable or overbuilt projects, it resulted in thousands of miles of railway track being laid in just a few years.
Similarly, the dotcom bubble of the late 1990s and early 2000s led to significant investment in fibre optic infrastructure, much of it laid by companies that did not survive the subsequent downturn. Both episodes resulted in painful recessions, but in each case, the infrastructure created became the foundation for future growth in industries and sectors beyond their own.
We consider the most dangerous bubbles to be those heavily fuelled by debt, and those unsupported by real, valuable innovation or technologies. The 1929 crash, exacerbated by significant margin borrowing, is a clear example. More recently, the 2008 global financial crisis was driven by excessive risk-taking in housing markets, fuelled by risky subprime mortgage lending, amplified by further leverage and complex financial products.
Predicting when a market has entered bubble territory, and might pop, is fiendishly difficult. The problem is, no two bubbles are the same. History is littered with false alarms and the cost of selling too soon can be significant, as Sir Isaac Newton learned many years ago. A polymath he may have been, but he is also believed to have lost roughly £20,000 (over £3m today) in the 1720 South Sea Bubble. The South Sea Company held a monopoly on trade with South America but became a speculative bubble based on buying up British national debt. Newton invested early, and initially sold for a handsome profit. However, as the bubble continued to grow, he reinvested an even larger sum but this time, right at the top of the market. Before long, the bubble popped and he lost everything.
Where might risks be building today?
Looking at market behaviour, and associated commentary, there are several areas arguably exhibiting bubble-like characteristics today, notably artificial intelligence (AI), private credit, and gold.
Artificial intelligence
AI is best understood not as a single technological event, but as a long-term, capital-intensive economic transition. In other words, it is a gradual, and somewhat expensive, shift in how the economy works. It has the potential to boost productivity across many areas and help create wealth over the long term. It has the potential to be a profound and transformative technology that should reshape the world of work and beyond. From an investment perspective, parallels are increasingly being drawn with the dot-com bubble, given elevated valuations and significant capital inflows into AI-related companies. A February 2026 Bank of America survey found that 23% of institutional credit investors identified an AI bubble as their primary concern. One key risk is the scale of capital expenditure on AI infrastructure, such as data centres.
That said, there are important differences today. Some key players in the AI build-out have seen significant share price appreciation and momentum. However, price is only half the story. The other half is earnings. Compare price to earnings and you get a basic sense of valuation. Not every fast-rising price is a potential bubble. Sometimes it’s the market repricing a real step change in profitability. Many leading AI companies are highly profitable, in contrast to the speculative, profitless growth seen during the dot-com era. Valuations today of the largest technology-led companies in the world, the so-called ‘Magnificent 7’, are also nowhere near as high as they were for the largest tech companies in 2000 (see figure 1 below which shows the price-to-earnings ratio, a measure that tells you how ‘expensive’ or ‘cheap’ a stock is relative to its profits).
In the context of recent volatility, we do not believe the sector is currently a candidate for potential bubble territory.
However, we remain selective, with a clear preference for profitable, high-quality businesses. Another useful measure, the debt-to-equity ratio, looks at a company’s financial leverage calculated by dividing its long-term debt by stockholders’ equity. While debt levels vary significantly across the sector – Morgan Stanley estimates hyperscalers will raise around $400bn in corporate bonds in 2026 to scale AI infrastructure – most of the big tech firms still have solid balance sheets. We also remain conscious of interconnected deals between the major players. For example, the big cloud companies are paying money into AI firms like OpenAI and Anthropic, with the same companies then spending that money buying cloud services back from them. In other words, some of the reported revenue may be coming from their own funding rather than fully independent customer demand.
Private credit
First, let’s define our terms. There is no one single definition of private credit, although there is one common characteristic: it is not publicly traded. Rather than borrowing from banks or issuing publicly traded bonds, in a private credit transaction companies raise finance directly from private lenders, typically institutional investors or specialist managers.
Private credit loans are typically floating rate and frequently senior secured, meaning they are first in line for repayment in the event of distress. The term ‘private credit’ is pretty broad. It contains several sub asset classes including middle market direct lending, distressed debt, special situations, and asset-backed finance.
Estimates of market size vary, but we believe the market stood at approximately $3trn at the start of 2025, broadly comparable to the size of the FTSE 100. Despite its size, more recently, sentiment towards the sector has deteriorated. Fund flows have moderated, default rates are rising from cyclical lows, and listed proxies, such as business development companies (BDCs) or listed credit funds, whose share prices provide a real-time market view on the value of private credit assets, are trading at discounts to net asset value. This suggests the market is less robust than it has been in recent years.
Could this end in a bubble? Time will tell, but we can say that the asset class has grown quickly, and recent news flow suggests the market is facing headwinds. We currently have no direct exposure to private credit, though we do hold limited investments in specialist lenders, accessed via listed investment trusts on the London Stock Exchange. These more liquid vehicles have delivered positive performance both last year and year-to-date. Nonetheless, we continue to monitor developments closely, given the potential wider financial market implications.
Gold
Readers may be surprised to see gold listed in this article. Gold has long been considered a safe haven, which sounds like the opposite of a bubble asset. Despite this, gold was famously described as “the longest-lasting bubble in human history” by economist Willem Buiter in 2009 (given we define a bubble only in hindsight, we tend to disagree). Its long history, physical nature and familiarity contribute to this perception. However, in modern markets, investment flows and central bank activity often dominate short-term price movements, and it generates no income.
That makes it harder to judge fair value and easier for enthusiasm to run too far. Gold’s value relies on someone else being willing to pay a higher price later. Its price is therefore largely underpinned by sentiment, backed up by its uniquely long-term track record, which suggests it will preserve value when confidence in currencies, policymakers or financial assets deteriorates. This is precisely why we continue to hold it. Gold plays a strategic role in diversified portfolios, providing a hedge against fiat currency depreciation and periods of systemic stress. We increased our allocation in recent years as our work on the Fragmentation regime strengthened the strategic. We have since trimmed positions as momentum and positioning became more stretched. Gold remains a useful diversifier, but it is ultimately a belief-driven asset.
Predicting the ‘pop’
So what does this mean for investors? Ultimately, it is not about predicting whena bubble will burst – because it may not. Indeed, selling out of a sector too early on fear of a bubble could also prove to be a mistake if you lose out on subsequent market momentum. Instead, it is about understanding the characteristics of bubbles, recognising warning signs, and focusing on disciplined portfolio construction:
- Revisit your investment objectives, time horizon and cash flow requirements
If you have known liabilities or spending needs, you should not rely on volatile assets to meet them. When uncertainty rises, effective risk management comes from planning, not prediction. A well-structured cash buffer enables patience.
- Maintain diversification
In the case of a technology like AI, we cannot yet fully assess the scale of its long-term impact. The appropriate approach is measured participation, diversified across companies, sectors, geographies, and asset classes.
- Remain disciplined
Periods of exuberance or fear can tempt investors to deviate from their strategies. Such decisions can have significant long-term consequences. Maintaining discipline is critical
Bubbles are an inherent feature of capital markets. They end painfully, but sometimes they lay the groundwork for future growth. As investors, the objective is to understand and navigate them effectively.
We cannot know with certainty whether a particular sector represents a bubble until it bursts. However, we do know that there will be both winners and losers. As markets determine which is which, periods of volatility are inevitable. Our role is to remove emotion, apply rigorous analysis, and remain active in identifying opportunities as they arise.
- Revisit your investment objectives, time horizon and cash flow requirements
If you have known liabilities or spending needs, you should not rely on volatile assets to meet them. When uncertainty rises, effective risk management comes from planning, not prediction. A well-structured cash buffer enables patience.
- Maintain diversification
In the case of a technology like AI, we cannot yet fully assess the scale of its long-term
impact. The appropriate approach is measured participation, diversified across companies, sectors, geographies, and asset classes.
- Remain disciplined
Periods of exuberance or fear can tempt investors to deviate from their strategies. Such decisions can have significant long-term consequences. Maintaining discipline is critical
Bubbles are an inherent feature of capital markets. They end painfully, but sometimes they lay the groundwork for future growth. As investors, the objective is to understand and navigate them effectively.
We cannot know with certainty whether a particular sector represents a bubble until it bursts. However, we do know that there will be both winners and losers. As markets determine which is which, periods of volatility are inevitable. Our role is to remove emotion, apply rigorous analysis, and remain active in identifying opportunities as they arise.
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