Concerns about market bubbles resurface, and Wall Street's "irrational exuberance" index soars again

As the U.S. stock market approaches historical highs, the issuance of new SPACs has surged, and Cathie Wood's flagship fund has recorded historic gains, Barclays' proprietary indicator measuring "irrational exuberance" in the market has sharply risen.

The one-month average of this indicator has rebounded to double digits at 10.7%, marking the first time it has surpassed 10% since February. Historically, this level often signals extreme market bubble conditions. The indicator is derived from derivatives metrics, volatility technical indicators, and sentiment signals inferred from the options market.

Current market sentiment is driven by multiple factors: investors are optimistic about progress in U.S. trade negotiations, or expect Trump may delay the July 9 tariff deadline, while the market speculates that the Federal Reserve will cut interest rates. As a result, U.S. stocks reached a historic high last Friday, the highest since February.

Barclays derivatives strategists warn that the rise in this indicator suggests that investors may be overly optimistic, which could lead to increased market volatility. Although timing a bubble is difficult, the current level has reached a historically extreme bubble state.

"Irrational Exuberance" Indicator Soars, Reaching Historical Highs Again

This proprietary indicator developed by Barclays aims to measure the degree of "irrational exuberance" in market sentiment, a term coined by former Federal Reserve Chairman Alan Greenspan to describe asset prices exceeding their fundamental values.

According to data from Barclays' derivatives research department, the one-month average of this indicator has returned to double digits for the first time since February, reaching a level of 10.7%. The historical average for this indicator is around 7%, but it has occasionally surpassed 10% during the late 1990s internet bubble and the "Meme stock" frenzy in 2021.

Stefano Pascale, head of U.S. equity derivatives strategy at Barclays, explains that this indicator (known as the "Stock Frenzy Indicator") is calculated using derivatives metrics, volatility technical analysis, and sentiment signals inferred from the options market, aiming to measure the proportion of "frenzy" stocks among U.S. stocks with liquid options. It is highly correlated with other popular indicators of retail investment, such as net borrowing positions in margin accounts (which show the amount of funds borrowed for trading).

Dave Mazza, CEO of Roundhill Investments, states that sentiment indicators such as relative strength indicators and valuation multiples appear to be excessively extended again:

" Fundamentals are once again giving way to speculation, with stocks of popular concepts trading like lottery tickets."

The current revival of "animal spirits" in the market is primarily driven by optimistic sentiment regarding trade agreements between the U.S. and major trading partners, or at least the expectation that Trump will delay the July 9 tariff deadline. Additionally, the market generally speculates that the Federal Reserve will cut interest rates. These positive expectations propelled U.S. stocks to a new high last Friday, the highest since February.

Mazza states:

“This sets the stage for a potential significant drop in the market when the next piece of negative news emerges.”

Frequent Bubble Signals: SPACs, Bitcoin Concept Stocks, and Meme Stocks Frenzy

Barclays believes that signs of market bubbles are everywhere. For example, the number of new blank check companies (SPACs) issued in 2025 has already exceeded the total from the past two years. At the same time, Cathie Wood's ARK Innovation ETF, representing unprofitable tech companies, has recorded the second-largest increase in history, second only to the surge after the pandemic.

In the second quarter, the stock prices of Bitcoin-related companies soared by 78%, quantum computing stocks rose by 69%, and meme stocks increased by 44%. These are all highly volatile investment areas, and the future returns that investors are betting on may not materialize. The basket of heavily shorted stocks also rose by 29%.

Pascale stated:

"The elevated readings of this indicator suggest that investors may be overly optimistic, which could lead to increased market volatility."

Despite the elevated levels of the indicators, Pascale believes that accurately timing a bubble is difficult, and it may continue to expand for a long time before a correction occurs. Therefore, he recommends going with the trend for now while using options to hedge against potential losses if the situation worsens