Ask The Compound: "Is This a Bubble?"
Date: September 3, 2025
Host: Ben Carlson
Co-hosts: Duncan Hill, Bill Sweet (guest)
Episode Theme:
This episode explores whether current high U.S. stock market valuations constitute a bubble, the nature of today’s markets versus historical norms, and what this means for investors. The hosts also field listener questions on retirement accounts (Roth IRAs & 401ks), lottery windfalls, retirement income strategies, and Roth conversions. The conversation blends financial history, practical advice, and lively banter, staying true to the show’s conversational, sometimes irreverent tone.
Main Theme Overview
The episode’s central question asks whether the current "nosebleed" valuations in the US stock market signal another bubble, a new normal, or just noise to ignore. Ben Carlson and team debate whether today’s high Price/Earnings (P/E) ratios are truly abnormal, given changes in corporate efficiency and profit margins, and explore what makes this moment unique compared to previous market history.
Key Discussion Points & Insights
1. Valuations: Bubble or New Normal?
- (03:11) Listener Mark asks whether current stock market valuations are unsustainable or if there's a legitimate reason they've been higher for 35 years.
- Ben Carlson: Draws from Peter Bernstein’s Against The Gods to explain “regression to the mean” and why the “mean” itself might be shifting.
- Three key points per Bernstein:
- Regression can proceed slowly, interrupted by shocks.
- Regression isn't always smooth—it can overshoot.
- The average ("mean") can itself move, creating a "new normal."
- Quote (Ben, 04:07):
“The mean itself may be unstable. So that yesterday's normality may be supplanted today by a new normality that we know nothing about. New normal. Heard of it?”
- Three key points per Bernstein:
- Modern Market Dynamics:
- Today’s S&P 500 includes more efficient, high-margin businesses (tech, SaaS, etc.) than the capital-intensive railroads and industrials of the past.
- Duncan, 05:48:
“Businesses are different than semiconductors.”
- Margins have trended up each decade—surviving recessions and crises.
- Mega-cap Tech Dominance:
- Market overvaluation is mostly concentrated in the top 10 stocks (mega-cap tech).
- Ben, 09:19:
“Most of this overvaluation exists in the mega cap tech stocks…those stocks should be expensive.”
- Bubble or Not?
- Suggests today’s valuations are on the high end (“closer to Disney World”), but maybe justified given corporate fundamentals.
- Ben, 10:08:
“This time definitely is different. But trees still don't grow to the sky… There is no line in the sand here.”
2. Valuation Expectations and Investing Approaches
- Expectations Over Growth:
- Cites Jeremy Siegel’s The Future for Investors—what matters is not actual growth, but growth versus expectation.
- Ben, 10:59:
“Expectations, especially in the short to intermediate term, matter more than anything… It’s better or worse than expected.”
- Market’s Forward-Looking Nature:
- Duncan points out markets price in hope for future growth, driving prices higher for companies seen as likely to outperform.
3. Roth IRA & 401(k) Balances
- (12:11) Listener M asks why Roth balances are low compared to traditional accounts.
- Bill Sweet joins (“Mr. Roth IRA”):
- History: Roths are relatively new (401k Roth feature since mid-90s, prevalence only recently widespread).
- Participation Data:
“80% of 401k plans had Roth options (2022). A 2025 Fidelity report showed 93%…but only 17% of participants use it.” (Bill, 14:14)
- Default Behavior: Most people leave money in traditional due to inertia and immediate tax deduction appeal.
- Contribution Limits: 401k has much higher allowable contributions than IRAs ($23.5k vs $7k), historical design favored employer incentives.
- Advice:
“Join us. Let’s make this a ‘Rothtober to remember!’” (Bill, 14:17)
4. Managing Powerball Lottery Windfall
- (18:51) Listener Andrew dreams of winning $270 million after-tax in the Powerball, seeks advice.
- Investment Guidance:
- For this scale, investments are less about need, more about wants and legacy.
- “The evergreen principles still apply—risk profile and time horizon matter.” (Ben, 21:54)
- Institutional investor rules: “It’s just a few extra zeros.”
- Specific steps: Ultra-high-net-worth management—estate, tax, insurance.
- Philosophy: Even with immense wealth, setting self-imposed limits is key. “You don’t need anything. It’s what do you want?” (Ben, 21:17)
- Bill’s Take: Should You Play?
- Statistically hopeless; lottery is just a “tax on poor math.”
- “Only 45% of wagers from lottery tickets end up as winnings…casinos pay roughly 9.90 on the dollar.” (Bill, 24:17)
- Suggests investing $20/week in the market—a vastly superior long-term “dream.”
5. Income-Based vs. Total Return Retirement Strategies
- (27:03) Listener criticizes Ben's skepticism toward income-based approaches.
- Ben’s Response:
- Key metric isn’t yield, but total return.
- Case Study: Annaly Capital—12% average yield over 10 years, but price declines meant only 6% total return.
- Quote (Ben, 28:21):
“Yield is not the only thing you should be looking at... you have to look at total return.”
- Tax Impact:
- Yield can generate bigger tax bills than capital gains.
- Bill's Insight (30:06): “$5,000/month of income equals $60,000/year. At 6%, that's a $1M portfolio, and you’re paying about $5,000 in tax per year. Not huge but significant…Total return trumps income alone.”
- Sequencing Risk:
- Income may reduce portfolio volatility but often sacrifices expected growth, exposing investors to inflation risk.
- "There's no easy button for retirement income.” (Ben, 31:55)
6. Roth Conversions (TSP/401k changes)
- (32:17) Listener Keith asks about converting his Thrift Savings Plan (TSP) to Roth when new rules hit in 2026.
- Situation: $96k in TSP, $64k salary, 35, single, cash in savings.
- Bill’s Analysis:
- Keith is straddling the 22% tax bracket; with likely income increases, no need to rush into massive Roth conversions (unless he expects income dips).
- Advises incremental Roth contributions rather than big one-time conversion—avoid jumping into higher tax brackets.
- “There’s no red flashing light that says 2026 is the year for our friend and listener, Keith.” (Bill, 35:55)
- Focus on maxing Roth IRA annually with cash saved.
7. Tariffs as a Hidden Tax
- (37:52) Duncan shares personal story: Ordered $126 vegan shoes from Spain, DHL demanded $43 tariff/ransom before delivery.
- “It feels like a tax…a big percentage!” (Duncan, 38:59)
- Light moment, but illustrates how tariffs become real for everyday consumers.
Memorable Quotes & Lively Moments
- Ben (Bubble question, 04:07):
“The mean itself may be unstable. So that yesterday's normality may be supplanted today by a new normality that we know nothing about. New normal. Heard of it?”
- Ben (Tech dominance, 09:19):
“Most of this overvaluation exists in the mega cap tech stocks…those stocks should be expensive.”
- Duncan (Practical investing, 10:34):
“The idea of the market is people are always going for the future, right?…They are willing to pay more today for the future.”
- Bill (Lottery skepticism, 23:22):
“Why not methamphetamine if you're not addicted to it?...[Lottery is] an empty dream. The statistical odds of winning are 1 in 238 million.”
- Ben (Fun money, 20:38):
“I do like the fun money approach. Take any sort of bonus or windfall and, and spending, enjoying it on yourself—vacation, kids, whatever.”
- Bill (Roth conversions, 35:55):
“There's no red flashing light that says 2026 is the year for our friend and listener, Keith.”
- Ben (Roth in retirement, 33:51):
“No one says 'I wish I had less Roth money in retirement.'”
- Duncan (Tariffs, 38:59):
“I’m not good at math, but that’s a big percentage like that.”
Timestamps for Important Segments
- 03:11 — Bubble question: stock valuations then & now
- 04:07 — Regression to mean and financial history
- 05:48 — How tech replaced railroads (corporate margins discussion)
- 09:33 — Mega-cap tech and market concentration
- 12:11 — Why so little money in Roth accounts? (Roth vs. 401k)
- 14:14 — Data on how many plans have Roth options/low usage
- 18:51 — Powerball winner: Managing a $270M windfall
- 21:17 — Investment advice for ultra-high-net-worth
- 23:22 — Should you ever play the lottery?
- 27:03 — Total return vs. income/yield in retirement investing
- 28:21 — The Annaly Capital yield vs. total return case study
- 32:17 — Roth conversions, TSP and tax bracket timing
- 37:52 — Duncan's shoes & revenge of the tariff
Practical (and Playful) Takeaways
- Valuations are high, but so is corporate efficiency; there’s no easy rule to call a bubble, especially in a “new normal.”
- Income vs. Total Return: Focusing solely on income/yield in retirement often overlooks significant factors (total return, taxes, inflation).
- Roth IRAs: Underutilized, partly due to inertia and consumer bias for immediate gratification.
- Lottery: Statistically a terrible bet—“tax on poor math.” But fun money is allowed, in moderation.
- Roth Conversion Strategy: Consider tax brackets—don’t act impulsively just because a new feature appears.
- Even ‘Hidden’ Taxes Like Tariffs Can Affect Your Wallet.
Overall Tone & Style
The team blends humor, data, and approachable analogies (“closer to Disney World” on valuation, “throwing Molotov cocktails” at theme park line jumpers, “Rothtober to remember”), keeping even technical topics lively and relatable. Audience questions spark direct, often playfully critical advice, especially on emotional money topics like winning the lottery or retirement withdrawal strategies.
For more, email the show: thecompoundshowmail.com or catch them live on YouTube.