Stock prices have risen dramatically since the outbreak of the pandemic began. A combination of low-interest rates increased retail trading, and government stimulus checks have propelled stock prices to unprecedented levels. Startups making their first forays into the stock market raised more money in 2020 than they had ever before—and then more than doubled that total in 2021. The dot-com bubble of the late 1990s has prompted some to question whether we are experiencing a similar bubble today.

Cathie Wood, the rockstar stock picker known for placing risky bets on disruptive technology companies, is adamant in her denial of the analogy. She argued in a blog post published on December 17 that the market may be experiencing a bubble but that it has nothing to do with technology stocks. The investments that we usually consider to be "safe bets," such as index funds, have instead seen their prices rise above their underlying value, according to her.

In defense of the stocks that encourage people to stay at home,

Typically, when market watchers express concern about a stock bubble, they think of tech startups such as Zoom and Peloton, whose stock prices rose by as much as tenfold during the pandemic to reach record highs. The value of these stocks increased as the world came to an end, as investors bet that the pandemic would be beneficial to the companies that developed the tools for work, shopping, exercise, and staying in touch with loved ones from the comfort of their homes.

However, as soon as wealthy countries began distributing vaccines and their citizens began spending more time outside the home, the value of these so-called "stay at home" stocks plummeted.

Wood's investment firm, ARK Invest, owns a significant amount of stock in companies that encourage people to stay at home. On the contrary, Wood has added to his holdings in companies such as Zoom, the telehealth platform Teladoc, and the electronic signature company DocuSign, while other investors have sold their holdings. She argues that after 11 months of freefall, these stocks have "entered deep value territory" and are currently trading at a discount to their historical earnings and future growth prospects, respectively.

Using a table, she demonstrated her point by contrasting the steep declines in these stocks with the steady gains they've made on fundamental business measures such as quarterly revenue at EBITDA, which is a rough measure of a company's profitability.

In Wood's opinion, the solid financial performance reported by these companies is evidence that "stay at home" stocks are still relevant in a hybrid world, in which people return to the outside world while maintaining some of the habits they developed during the pandemic. According to her, "the coronavirus crisis permanently altered the way the world works, catapulting consumers and businesses into the digital age much more quickly and deeply than would have otherwise been the case."

Index funds are trading at or near record highs in terms of valuation.

On the other hand, Wood argues, investors have overestimated the value of index funds, which aim to reduce risk by investing in a broad range of stocks from the largest companies on the market. Because of concerns about inflation and the economic ramifications of an omicron-fueled surge in covid-19 cases, more investors are abandoning risky funds such as ARK in favor of the safety and predictability of index funds.

According to Woods, the S& P 500 index, for example, is a benchmark for mutual funds, which has resulted in inflated valuations that are out of proportion to their underlying performance.

An S&P 500 fund's share price has reached all-time highs in recent weeks, and the stock index's price-to-earnings ratio has remained above typical levels throughout the outbreak of the flu pandemic. When you compare the price of one share of a company's stock to the amount of revenue a company earns, you can get a general idea of how overpriced a share is.) When the ratio is higher, the stock is considered more expensive concerning its actual business performance.)

The stock market bubble is only as big as the eyes of those who see it.

Without a doubt, the price to earnings ratio of the S& P 500 is still insignificant when compared to that of "stay at home" stocks such as Zoom. Zoom's price-to-earnings ratio of approximately 54 is more than double the S& P's price-to-earnings ratio of roughly 24.

However, as Woods points out, those "stay at home" stocks have seen their valuations come closer to reality. In contrast, the price of index funds has begun to float above the underlying performance of the businesses they represent, indicating that they are becoming more valuable. A conservative investor can reject the volatility of ARK Invest's portfolio in favor of an index fund's slower, more consistent growth. On the other hand, a more aggressive investor might agree with Wood, who believes that index funds are overvalued and will deliver disappointing returns over the next decade.

In other words, the bubble is only as good as the person who sees it.