Is the Stock Market “Irrationally Exuberant” Now?

To borrow a phrase from former Federal Reserve Chairman Alan Greenspan, some commentators are calling the current U.S. stock market “irrationally exuberant.” This may be the case, but it’s not an open invitation to short-sell stocks in 2025’s second half.

There’s no denying that short-term traders have unleashed their animal spirits on the market lately. For the first time since February, the major U.S. stock market indexes are tapping new all-time highs.

It’s quite a turnaround in sentiment since April, when traders feared that tariffs would send inflation soaring and collapse the economy. It’s still too early to make a final determination, but so far, the worst-case scenarios haven’t played out.

Always bear in mind that the market is extremely forward-looking and investors will try to anticipate what they think will happen in the future. Instead of selling because they think tariffs will put pressure on the economy, stock traders are buying because they’re looking ahead toward the recovery that would happen afterwards.

Courtesy: Liz Ann Sonders

This anticipation strategy helps to account for the V-shaped recovery in stocks since April. It also helps to explain why the S&P Growth Index gained 18.8% in Q2 2025 while the S&P 500 Value Index only rose 2.5% during that time.

Amazingly, 2025’s second quarter saw the biggest outperformance of growth stocks versus value stocks since the mid-1990s (or possibly longer than that, as the chart only dates back to 1995). This could certainly be interpreted as a sign of “irrational exuberance.”

Of course, the media is busy reporting on the V-shaped recovery of large-cap stocks but doesn’t have much to say about gold, silver, and Bitcoin. These so-called alternative asset classes easily outperformed the S&P 500 and NASDAQ 100 during the first half of 2025.

Still, reporters will continue to focus on the major stock market indexes and investors shouldn’t disregard the possibility of a pullback. Roundhill Investments CEO Dave Mazza summed up many commentators’ concerns, warning, “Fundamentals have taken a back seat again as stocks with hot narratives are trading like lottery tickets… That sets the stage for a sharp air-pocket on the next bad headline.”

Courtesy: @GlobalMktObserv

It’s not difficult to amass a collection of “irrational exuberance” warning signals if you’re looking for them. For example, the Buffett indicator (i.e., the ratio of the total market cap of U.S. stocks to the U.S. GDP) is currently above 200%.

Strategists with Barclays are adding to the pile of warning signs, noting that listings of blank-check SPAC companies in 2025 so far are already surpassing the last two years combined. The Barclays analysts also observed that Cathie Wood’s ARK Innovation ETF (ARKK) – which includes a number of technology firms, some of which aren’t currently profitable – recently posted one of its biggest rallies in history.

Stefano Pascale, head of U.S. equity derivatives strategy at Barclays, suggested that “investors may be overly exuberant, which could lead to increased market volatility.” Does this mean it’s a good time to short-sell (i.e., bet against) large-cap stocks now?

I wouldn’t recommend it, as there’s an old saying that still holds true: the market can remain irrational longer than you can remain solvent. Trying to be a short-selling hero by timing an imminent market drop is an awfully difficult game to win.

It’s perfectly fine if you choose not to play that game at all. You can continue to monitor the news and overall market sentiment, but don’t let short-term headlines dissuade you from your most successful long-term convictions if they’ve worked for you again and again.