Market Bubble Analysis: Mike Khouw's Assessment vs Current Valuation Extremes

This analysis is based on the CNBC Power Lunch segment [1] featuring Mike Khouw, Chief Strategist at OpenInterest.pro, published on October 28, 2025, which addressed ongoing market concerns about potential bubble conditions.

The market analysis reveals significant disagreement among prominent market experts regarding bubble risks. Mike Khouw, a 25+ year Wall Street veteran and options specialist, contends that the macro stock market is not in a bubble [1]. This position directly contrasts with Ray Dalio’s warning on the same day that “a risky AI market bubble is forming” at an investing summit in Saudi Arabia [5]. This divergence of expert opinion creates uncertainty for market participants and highlights the complexity of current market dynamics.

Current market metrics show concerning parallels to historical bubble periods across multiple dimensions:

• Growth vs. Value Ratio
  : Has reached a new all-time high, surpassing the dot-com bubble peak from March 2000 [4]
• Tech Sector Outperformance
  : Currently at record levels, above both last year’s peak and the March 2000 high [4]
• Price-to-Sales Ratio
  : S&P 500 trading at over 3.3x sales, its highest in history [4]
• Price-to-Peak Earnings
  : Climbed to 27.9, over 60% above historical median and at highest level since 2000 [4]

Despite these extreme valuations, the Morningstar US Market Index has risen 35% since April 2025 and 15% over the past year, demonstrating continued market momentum [3].

Khouw’s analysis likely incorporates options market data that may provide different insights than traditional valuation metrics. His firm OpenInterest.pro specializes in options flow analysis, which can reveal institutional positioning and market sentiment not apparent from price action alone [2]. Recent options market activity shows significant retail participation in speculative trades, particularly in meme stocks and AI-related companies. Khouw has previously warned that “meme stock trading is dominating the options market” and cautioned investors to “beware the adrenaline rush” [6].

While valuations are elevated, corporate earnings have continued to climb, with S&P 500 profits projected to hit another new high in Q3 2025, up 10% year-over-year [4]. This earnings growth provides fundamental support to current market levels, potentially supporting Khouw’s anti-bubble thesis. However, the market’s 17% gain over the past year has been driven largely by multiple expansion rather than earnings growth, raising sustainability concerns [4].

An important contextual factor is the relative performance shift between international and US equities. International stocks have outperformed US equities this year, with Europe up 35% versus 14% for the S&P 500 [4]. This divergence may influence bubble dynamics and suggests that market conditions vary significantly across regions.

While comparisons to the late 1990s are common, the current technology sector differs in important ways. Today’s tech companies generally have more established business models, stronger balance sheets, and clearer paths to profitability than many dot-com era companies. However, the speed of AI adoption and its potential economic impact creates uncertainty that may justify some premium valuation.

1. Valuation Extremes
   : Current valuation metrics are at or above historical bubble peaks across multiple measures [4]
2. Concentration Risk
   : Extreme outperformance of growth and tech stocks creates concentration risk in portfolios [4]
3. Policy Sensitivity
   : As Dalio noted, monetary policy tightening could trigger a correction [5]
4. Speculative Activity
   : Elevated options trading and meme stock participation suggest increased retail speculation [6]

Decision-makers should closely monitor:

1. Federal Reserve Policy
   : Any shift toward tighter monetary policy could be a catalyst for correction [5]
2. Earnings Quality
   : Whether earnings growth can continue supporting elevated valuations [4]
3. Options Market Metrics
   : Changes in implied volatility, put-call ratios, and institutional positioning [2]
4. Market Breadth
   : Whether market gains are broadening or narrowing to fewer names

Critical missing information includes Khouw’s specific reasoning and data supporting his conclusion, his comparative analysis framework differentiating current conditions from the late 1990s bubble, and his views on sector-specific bubble risks, particularly in AI-related stocks.

The market presents a complex picture with conflicting expert assessments. While valuation metrics show bubble-like characteristics at historical extremes, supporting fundamentals including continued earnings growth provide some justification for current levels. The options market perspective offered by Khouw may reveal insights not captured by traditional valuation analysis. International outperformance relative to US stocks adds another layer of complexity to the analysis. Market participants should consider both the bubble risk indicators and the fundamental supporting factors when evaluating current market conditions.