Will the U.S. retail speculation bubble reappear? This time it might be different
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Will the U.S. retail speculation bubble reappear? This time it might be different
Despite the risk of capital misallocation, historical experience suggests that the bursting of such speculative bubbles typically does not spill over into the broader market.
Navigating Web3 tides with focused insightsBy Bu Shuqing, Wall Street Insights
Meme stocks have reemerged, igniting retail speculation and fueling market euphoria in July, sparking concerns about stock market bubbles. However, analysts believe the spillover effects of this latest speculative wave on the broader market are relatively limited.
Analysts note that unlike the 2021 meme stock frenzy led by GameStop and AMC Entertainment, current speculative activity is largely concentrated in small-cap and low-priced stocks, having negligible impact on major indices such as the S&P 500.
Despite risks of capital misallocation, historical precedent suggests that the bursting of such speculative bubbles typically does not spread to the wider market.
Low-Priced Stocks Become New Favorites for Speculation, Trading Volume Hits Record Highs
The most notable feature of the July market was the frenzied pursuit of low-priced stocks. Data shows that the median gain for the lowest-priced decile of stocks reached 16% by July 23—when the latest meme stock surge peaked—far exceeding the 1.4% gain of the highest-priced stocks. A stock’s starting price became the best predictor of its performance during the month.
This investment logic based on share price rather than company fundamentals appears absurd to institutional investors. Companies can easily alter their stock price through simple stock splits or reverse splits without affecting shareholders' actual ownership stakes or profit entitlements. Unless a stock trades below $1 for an extended period and faces delisting risks, the absolute stock price itself holds little practical significance.
Yet, many retail investors either fail to understand this basic principle or choose to ignore it. During July’s trading frenzy, these investors’ strategy indeed worked, while professional investors’ rational analysis failed. When the speculative surge reversed at month-end, the cheapest stocks fell the most—by as much as 6%.
Concerns Over Capital Allocation Emerge, Historical Lessons Warrant Caution
Excessive speculation may lead to inefficient capital allocation, and the 2021 meme stock boom already provided a clear example.
Back then, companies like GameStop and AMC issued billions of dollars in new shares at elevated prices, only to see their stock prices collapse afterward. GameStop and AMC currently trade 74% and 99% below their peak levels, respectively.
Economist John Maynard Keynes warned in 1936 that when “enterprise becomes the bubble on a whirlpool of speculation,” capital flows to the wrong companies, harming growth and employment. This concern remains relevant today, especially when speculative funds flood into companies with weak fundamentals.
However, the scope of current speculative activity is relatively narrow.
There are no low-priced stocks in the S&P 500, and cheaper large-cap stocks did not show any significant outperformance pattern in July. Back in 2021, when retail investors inflated green stocks, SPACs, and unprofitable tech stocks, the bursting of those bubbles similarly had minimal impact on the broader market.
Market Sentiment Turns More Rational, Overall Risks Remain Controllable
Long-term sentiment surveys from the American Association of Individual Investors and Investors Intelligence indicate that while investor sentiment is more positive now than at the beginning of the year, it has not yet reached overly optimistic levels. Futures traders show a preference for call options, but to a much lesser extent than in 2021.
Analysts estimate that retail investors may have helped lift the S&P 500 index through buying on dips since April, but their influence in July was relatively limited.
The current wave of so-called DORK stocks (named after ticker symbols such as Krispy Kreme, Opendoor Technologies, Rocket, and Kohl's) is merely the visible manifestation of private traders’ summer speculative spree.
While investors have valid reasons to worry about high valuations, tariff impacts on earnings, underlying economic weaknesses, and excessive enthusiasm for artificial intelligence, the boom-and-bust cycle of meme stocks and low-priced equities has had minimal spillover effects on the rest of the market. Historical experience suggests such speculative episodes are largely peripheral phenomena rather than significant sources of systemic risk.
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