U.S. Stocks Rise at Greater Risk: “Irrational Exuberance” Indicator Hits Bubble Level as U.S. Economy Flashes Yellow Warning

TradingKey - U.S. stock investors have largely shrugged off concerns such as trade tariffs, economic slowdown, and rising government deficits. In the first half of 2025, the S&P 500 has delivered record highs by mid-year. Although major investment banks remain optimistic about year-end equity performance, many strategists have turned cautious — suggesting that the “market bubble” narrative may actually hold merit.

Barclays’ proprietary indicator for measuring market bubbles shows that current U.S. equity markets face extreme bubble risk. Since February, the bank’s "Irrational Exuberance" index has returned to double-digit percentages, reaching 10.7% in recent readings.

The index is calculated based on derivatives indicators, volatility technical indicators, and sentiment signals inferred from the options market. Its historical average is 7%. It occasionally exceeds 10%, as seen during the Internet bubble of the 1990s and the meme stock surge in 2021.

Barclays cited several signs of market froth:

• The number of SPAC listings in 2025 has already surpassed the total of the previous two years combined
• The ARK Innovation ETF (ARKK) — a barometer for unprofitable tech companies led by Cathie Wood — has recorded one of its strongest rallies since the post-pandemic rebound

Analysts pointed out that the recent market momentum was driven by ongoing tariff negotiations with trade partners, along with rising expectations for Fed rate cuts, which boosted trading activity.

In reality, however, the fundamentals of the U.S. economy are still not strong enough to support such bullish market moves, with many uncertainties remaining.

JPMorgan analysts said that it's like Goldilocks waking up to three bears — this optimism may be challenged in certain areas.

Economists noted that the outlook for the second half of the year remains unclear. Based on recent data, the U.S. Q1 GDP growth was revised downward, core PCE inflation edged higher, and the number of continuing unemployment claims hit a four-year high — all pointing to a less-than-encouraging economic environment.

Bank of America economists stated that some yellow lights have appeared in the economy, but no clear red flags yet. The U.S. economy now appears to be at a crossroads — if something is going to happen, it will likely unfold soon.