Bubble warning signal! As US stocks hit new highs, a "irrational exuberance" indicator breaks the warning line

According to Zhitong Finance APP, the stock speculation craze has once again swept the entire U.S. stock market, with a crucial "irrational exuberance" indicator breaking through the bubble warning line. After experiencing the impact of tariff sell-offs in April, the U.S. stock market quickly regained lost ground. As of the time of writing, the three major indices continue to consolidate near historical highs. The issuance of Special Purpose Acquisition Companies (SPACs) has significantly rebounded, and the flagship fund ARK Innovation ETF (ARKK), managed by the so-called "queen of tech stocks" Cathie Wood, has recorded historic gains.

This series of phenomena is driving the rapid rise of the "irrational exuberance" monitoring indicator developed by Barclays. This classic concept, proposed by former Federal Reserve Chairman Alan Greenspan, aims to warn of the potential risks of asset prices deviating from their fundamental values.

According to the latest data from Barclays, its exclusively compiled "Irrational Exuberance Index" has surpassed the double-digit critical value for the first time since February, reaching a warning level of 10.7%. This indicator combines data from the derivatives market, volatility technical indicators, and sentiment signals from the options market, with a historical average of about 7%. However, it tends to break through the 10% mark during periods of extreme market exuberance. Historically, this indicator has only reached similar heights during the late 1990s internet bubble and the 2021 retail investor frenzy.

Dave Mazza, CEO of Roundhill Investments, pointed out, "The current market exhibits typical characteristics of thematic speculation, with the performance of popular concept stocks resembling a lottery draw, and traditional fundamental analysis is gradually becoming ineffective." He observed that sentiment indicators such as the Relative Strength Index (RSI) and price-to-earnings ratios are collectively rising, and this irrational exuberance lays the groundwork for severe volatility in the face of potential negative news in the future.

Market optimism mainly stems from two aspects: first, the expectation that the U.S. will soon reach an agreement with major trading partners is heating up; second, speculation that the Trump administration may delay the effective date of tariffs on July 9, combined with the ongoing fermentation of expectations for Federal Reserve interest rate cuts, has driven the S&P 500 index to achieve its first closing historical high since February on Friday.

Bubble characteristics are manifesting in multiple areas: the number of new SPAC companies listed in 2025 has already exceeded the total for the previous two years, and the ARK Innovation ETF's year-to-date gains rank third in history, second only to the epic rebound after the COVID-19 pandemic. Performance in specific sectors is even more extreme: Bitcoin-related stocks surged 78% in the second quarter, the quantum computing sector soared 69%, meme stocks averaged a 44% increase, while the stocks with the highest short ratios surprisingly rose 29%. Stefano Pascal, head of U.S. equity derivatives strategy at Barclays, emphasized, "The indicator reading breaking through the threshold indicates that investor sentiment is overly exuberant, and there is a risk of amplified market volatility."

It is worth noting that this indicator is highly positively correlated with retail participation metrics such as net borrowing positions in margin accounts. Despite frequent bubble signals, Pascal believes that precise timing remains challenging, as historical experience shows that the duration of bubbles often exceeds market expectations It is recommended that investors, while following the trend, should construct risk hedging portfolios using options tools to guard against potential pullback impacts. The current market pattern once again confirms that in an environment where ample liquidity and speculative enthusiasm intertwine, asset price fluctuations may continue to test investors' nerves