Is the retail investor speculation bubble reappearing in the US stock market? This time it may be different

Meme stocks are making a comeback, igniting retail investors' speculative enthusiasm and leading to a market frenzy in July, which has raised concerns about a stock market bubble. However, analysts believe that the spillover effect of this round of speculation on the overall market is relatively limited.

Analysts note that unlike the 2021 meme stock craze dominated by GameStop and AMC Entertainment, the current speculative activity is mainly concentrated in small-cap and low-priced stocks, with minimal impact on major indices like the S&P 500.

Despite the risk of capital misallocation, historical experience shows that such speculative bubbles typically do not affect the broader market when they burst.

Low-priced stocks become the new favorites for speculation, with trading volumes hitting record highs

The most notable feature of the July market is the frenzied pursuit of low-priced stocks. Data shows that the median price increase of the lowest tenth of stocks at the beginning of the month reached 16% when the new round of meme stocks peaked on July 23, far exceeding the 1.4% increase of the highest-priced stocks. The initial stock price has become the best predictor of performance for the month.

This investment logic, based on stock price rather than company fundamentals, seems quite absurd to institutional investors. Companies can easily change their stock prices through simple stock splits or reverse splits without affecting shareholders' actual ownership or profit distribution. Unless a stock price remains below $1 for an extended period and faces delisting risk, the absolute stock price itself has no real significance.

However, many retail investors either do not understand this basic principle or choose to ignore it. During the frenzied trading in July, these investors' strategies indeed worked, while the rational analysis of professional investors failed. When the speculative frenzy reversed at the end of the month, the cheapest stocks also saw the largest declines, reaching 6%.

Concerns about capital allocation emerge, historical lessons warrant caution

Excessive speculation can lead to improper capital allocation, and the meme stock craze of 2021 has provided a clear example.

At that time, companies like GameStop and AMC took advantage of high stock prices to issue billions of dollars in new shares, but their stock prices subsequently fell sharply. GameStop and AMC are currently down 74% and 99% from their peaks, respectively.

Economist John Maynard Keynes warned in 1936 that when "real enterprises become bubbles in a speculative whirlpool," capital will flow to the wrong companies, harming growth and employment. This concern is equally applicable in the current environment, especially when speculative funds flood into companies with weak fundamentals.

However, the scope of the current speculative activity is relatively limited.

There are no low-priced stocks in the S&P 500 index, and cheaper stocks among large companies did not show any significant performance patterns in July. When retail investors pushed up green stocks, SPACs, and loss-making tech stocks in 2021, the bursting of these bubbles also had minimal impact on the broader market.

Market sentiment is becoming more rational, overall risk is controllable

Long-term sentiment surveys from the American Association of Individual Investors and Investors Intelligence show that while current investor sentiment is more positive than at the beginning of the year, it has not reached excessive optimism levels. Futures traders tend to favor call options, but to a much lesser extent than in 2021.

Analysts estimate that retail investors may have pushed up the S&P 500 index through buying on dips since April, but their impact in July was relatively limited The current new round of Meme stocks, referred to as DORK stocks (derived from the ticker symbols of companies like Krispy Kreme, Opendoor Technologies, Rocket, and Kohl's), is merely a public manifestation of the summer speculation frenzy among retail traders.

Although investors have reasons to be concerned about high stock prices, the impact of tariffs on earnings, potential economic weaknesses, and excessive enthusiasm for artificial intelligence, the boom and bust of Meme stocks and low-priced stocks have relatively limited spillover effects on the rest of the market. Historical experience indicates that such speculative activities are more of a fringe phenomenon in the market rather than a significant source of systemic risk