Dudley Warns Stock Market Bubble Territory as Treasury Boosts Buybacks

Former Federal Reserve Bank of New York President Bill Dudley has sounded the alarm on the US stock market, calling it 'bubble territory'. According to Dudley, stretched valuations and a slowing artificial intelligence (AI) investment cycle are key indicators. The Shiller cyclically adjusted price-to-earnings ratio (CAPE) is near 41, far above its 25 to 30-year average of 17.

Dudley also cited the Buffett Indicator, which shows the stock market value to GDP ratio at around 240%. Warren Buffett has stated that readings above 100% signal an overvalued market. This suggests the current market is strongly overvalued.

Dudley expects a slowdown in capex growth among AI hyperscalers in 2027, which would squeeze profit margins and potentially lead to a market correction. The Treasury Department's recent bond buyback increase has added pressure on the Federal Reserve to address the issue.