There’s a little ‘irrational exuberance’ in markets: Strategist
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S&P 500, Nasdaq close at records on jobs data; Nvidia market cap nears $4 trillion
The S&P 500 and Nasdaq closed at record highs, notching a third week of gains. The Dow closed up 0.77%, only 0.41% away from its own record.Chipmaker Nvidia rose 1.3%, putting its market capitalization at $3.89 trillion. The company is close to overtaking Apple’s all-time record and becoming the world’s most valuable company in history.”We are seeing a real bout of irrational exuberance,” said Kristina Hooper, Chief Market Strategist at Man Group in New York. “But there’s some level of relief because the jobs report was not as weak as it could have been,” she said.
NEW YORK (Reuters) -Wall Street rallied on Thursday to record closing highs, as chipmaker Nvidia rose closer to a $4 trillion valuation and a surprisingly strong U.S. jobs report cheered investors, who shrugged off dimming chances for an interest rate cut this month.
The S&P 500 and Nasdaq closed at record highs, notching a third week of gains. The Dow closed up 0.77%, only 0.41% away from its own record.
Chipmaker Nvidia rose 1.3%, putting its market capitalization at $3.89 trillion. The company is close to overtaking Apple’s all-time record and becoming the world’s most valuable company in history.
Trading volume was light in a shorter session on the eve of Friday’s U.S. Independence Day holiday.
“We are seeing a real bout of irrational exuberance; the stock market is very biased towards optimism,” said Kristina Hooper, Chief Market Strategist at Man Group in New York.
“But there’s some basis for it. I think there is some level of relief because the jobs report was not as weak as it could have been.”
The rally has been fueled by retail investors, who are largely ignoring the inflationary pressure on the horizon, uncertainty around tariffs and “are focused on the tangible, which is today’s jobs report,” she said.
The S&P 500 gained 51.94 points, or 0.83%, to 6,279.36 and the Nasdaq Composite gained 207.97 points, or 1.02%, to 20,601.10. The Dow Jones Industrial Average rose 344.11 points, or 0.77%, to 44,828.53.
Data showed nonfarm payrolls increased by 147,000 jobs last month, 33% more than the 110,000 jobs forecasted by economists polled by Reuters. Unemployment fell to 4.1% last month, a better result than the 4.3% expected.
Traders quickly priced out chances of an interest-rate cut in July, with the odds of a 25-basis-point reduction in September at 68%, according to CME Group’s Fedwatch tool, down from 74% a week ago.
After markets closed, Republicans in the U.S. House of Representatives approved President Donald Trump’s massive tax-cut and spending bill, an expected outcome.
The legislation will add $3.4 trillion to the nation’s $36.2 trillion debt, according to the nonpartisan Congressional Budget Office, and will also push millions of Americans off health insurance.
Large tax cuts and increased government spending can boost demand in the economy. This can add inflationary pressure, especially when the economy shows signs of strength, such as the latest jobs report.
“Some data points, like the jobs report, are positive and charming. But if we just take a step back, the picture is not that great,” said Alex Morris, CEO of F/m Investments, which manages $18 billion in Washington, D.C.
Global stocks are vulnerable in 2025
Rising valuations over the past two years leave global stocks in a vulnerable position. The S&P 500 clocked one of its strongest two-year periods of returns since 1928. Much of the rise in stocks reflects better fundamental growth than investors had expected.
By the end of last year, the S&P 500 clocked one of its strongest two-year periods of returns for the index since 1928. Much of the rise in stocks reflects better fundamental growth than investors had expected, and rising valuations have been a significant contributor to recent performance.
“The powerful rally in equity prices in recent months leaves equities priced for perfection,” Peter Oppenheimer, chief global equity strategist and head of Macro Research in Europe, writes in the team’s report. “While we expect equity markets to make further progress over the year as a whole — largely driven by earnings — they are increasingly vulnerable to a correction driven either by further rises in bond yields and/or disappointments on growth in economic data or earnings.”
A decline in interest rates has been associated with strong equity returns in the past. In the US, for example, Federal Reserve rate-cutting cycles have often coincided with rising stock prices as long as the economy avoids slipping into recession.
S&P 500, Nasdaq close at records on jobs data; Nvidia market cap nears $4 trillion
The S&P 500 and Nasdaq closed at record highs, notching a third week of gains. The Dow closed up 0.77%, only 0.41% away from its own record. Trading volume on U.S. exchanges was 10.85 billion shares, much lighter than the 17.82 billion average for the last 20 days. The rally has been fueled by retail investors, who are largely ignoring the inflationary pressure on the horizon, uncertainty around tariffs and “are focused on the tangible, which is today’s jobs report,” said Kristina Hooper, Chief Market Strategist at Man Group in New York. The odds of a 25-basis-point reduction in September at 68%, according to CME Group’s Fedwatch tool, down from 74% a week ago. After markets closed, Republicans in the House of Representatives approved President Donald Trump’s massive tax-cut and spending bill, an expected outcome.
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NEW YORK, July 3 (Reuters) – Wall Street rallied on Thursday to record closing highs, as chipmaker Nvidia rose closer to a $4 trillion valuation and a surprisingly strong U.S. jobs report cheered investors, who shrugged off dimming chances for an interest rate cut this month.
The S&P 500 and Nasdaq closed at record highs, notching a third week of gains. The Dow closed up 0.77%, only 0.41% away from its own record.
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Trading volume was light in a shorter session on the eve of Friday’s U.S. Independence Day holiday.
“We are seeing a real bout of irrational exuberance; the stock market is very biased towards optimism,” said Kristina Hooper, Chief Market Strategist at Man Group in New York.
“But there’s some basis for it. I think there is some level of relief because the jobs report was not as weak as it could have been.”
The rally has been fueled by retail investors, who are largely ignoring the inflationary pressure on the horizon, uncertainty around tariffs and “are focused on the tangible, which is today’s jobs report,” she said.
Data showed nonfarm payrolls increased by 147,000 jobs last month, 33% more than the 110,000 jobs forecasted by economists polled by Reuters. Unemployment fell to 4.1% last month, a better result than the 4.3% expected.
Nonfarm payrolls
A trader works on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., July 1, 2025. REUTERS/Jeenah Moon/ File Photo Purchase Licensing Rights , opens new tab
Traders quickly priced out chances of an interest-rate cut in July, with the odds of a 25-basis-point reduction in September at 68%, according to CME Group’s Fedwatch tool, down from 74% a week ago.
After markets closed, Republicans in the U.S. House of Representatives approved President Donald Trump’s massive tax-cut and spending bill, an expected outcome.
The legislation will add $3.4 trillion to the nation’s $36.2 trillion debt, according to the nonpartisan Congressional Budget Office, and will also push millions of Americans off health insurance.
Large tax cuts and increased government spending can boost demand in the economy. This can add inflationary pressure, especially when the economy shows signs of strength, such as the latest jobs report.
“Some data points, like the jobs report, are positive and charming. But if we just take a step back, the picture is not that great,” said Alex Morris, CEO of F/m Investments, which manages $18 billion in Washington, D.C.
For the week, the S&P 500 gained 1.72%, the Nasdaq rose 1.62%, and the Dow climbed 2.3%. The Russell 2000 Small Cap index rose 3.41%.
“It’s kind of perplexing,” Morris said. “This feels like that last bull rush before all of the data really comes together.”
Tripadvisor (TRIP.O) , opens new tab climbed 16.7% after the Wall Street Journal reported activist investor Starboard Value had built a stake of more than 9% in the online travel company.
Datadog (DDOG.O) , opens new tab jumped 14.9% after the cloud security firm was set to replace Juniper Networks on the S&P 500.
Markets closed at 1 p.m. ET. Trading volume on U.S. exchanges was 10.85 billion shares, much lighter than the 17.82 billion average for the full session over the last 20 trading days.
Reporting by Sabrina Valle In New York, Sruthi Shankar in Bengaluru; Editing by Pooja Desai and David Gregorio
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Investors Have Rarely Been So Optimistic – Irrational Exuberance at Play?
Investor exuberance has rarely been so optimistic, according to the Conference Board’s Sentiment Index. While optimism can drive short-term gains, history shows that when sentiment runs too hot, and valuations detach from fundamentals, such leaves the markets vulnerable to declines. While valuations are HORRIBLE predictors of 12-month returns, they indicate “exuberance,” which impacts markets in the near term. Over the past 25 years, there have been many times when the Intermediate-term Optimism Index for stocks was more than 50% higher than the Bondoptimism Index. For the past two months, bond investors have been feeling gloomy about the prospects of the stock market. That has caused the spread between stock and bond sentiment on the relative merits of the two markets to spike to a high to close to a multi-decade high. But, with that said, as we discussed in “Low Forward Returns,“ valuations is a terrible market timing tool.
“Consumer confidence in higher stock prices in the next year remains at the highest since 2018, following the 2017 “Trump” tax cuts.“ (Note: this survey was completed before the Presidential Election.)
We also discussed households’ allocations to equities, which, according to Federal Reserve data, have reached the highest levels on record.
In that article, we discussed the risk associated with high levels of investor exuberance.
“Risk isn’t always what it seems. When the market feels the safest, that’s often when it’s often the riskiest. Think about it — when everything is going smoothly, people tend to take more risks, which can lead to market bubbles and crashes.”
However, it is crucial to understand that “exuberance” is a necessary ingredient for pushing asset prices higher. This is why “sellers live higher, and buyers live lower.” In every market and asset class, the price is determined by supply and demand. If there are more buyers than sellers, then prices rise, and vice-versa. While economic, geopolitical, or financial data points may temporarily affect and shift the balance between those wanting to buy or sell, in the end, the price is solely determined by asset flows.
Currently, a liquidity surge supports investor exuberance, marked by enthusiastic buying and excessive risk-taking. As we will discuss, such activity often precedes significant market corrections.
While optimism can drive short-term gains, history shows that when sentiment runs too hot, and valuations detach from fundamentals, such leaves the markets vulnerable to declines.
The Psychology of Market Euphoria
Nobel Prize-winning economist Robert Shiller famously coined “irrational exuberance” to describe situations where speculative behavior pushes asset prices far above intrinsic values. Shiller’s research shows that emotional narratives and herd behavior dominate in bull markets, fueling market increases that eventually revert under the weight of reality. He warned that “markets can stay irrational longer than you can stay solvent,” reflecting how unpredictable and dangerous excessive optimism can become.
Similarly, Jeremy Grantham, a seasoned investor known for identifying bubbles, recently described the post-2009 bull market as an “epic bubble” driven by speculative behavior and extreme overvaluation. Unsurprisingly, as market prices increase, exuberance builds, and investors rationalize overvaluation by believing that “this time is different.”
However, with that said, as we discussed in “Low Forward Returns,“ valuations are a terrible market timing tool. Valuations only measure when prices are moving faster or slower than earnings. In other words, valuations are a measure of psychology in the short term. To wit:
“Valuation metrics are just that – a measure of current valuation. More importantly, when valuation metrics are excessive, it is a better measure of ‘investor psychology’ and the manifestation of the ‘greater fool theory.’ As shown, there is a high correlation between our composite consumer confidence index and trailing 1-year S&P 500 valuations.”
Investors repeatedly make the mistake of dismissing valuations in the short term because there is no immediate impact on price returns. However, as noted above, while valuations are HORRIBLE predictors of 12-month returns, they indicate “exuberance,” which impacts markets in the near term.
Understanding that valuations reflect psychological exuberance, what can we expect from markets over the next 12 months?
Expect Increased Volatility
As noted recently by Sentiment Trader:
“It almost doesn’t matter what measure we look at. There are some isolated exceptions, but most indications suggest that investors are optimistic about the prospects for stocks in the months ahead. It’s a different story in the bond market. After a brief bout of not-pessimism a couple of months ago, bond investors are back to feeling gloomy. That difference of opinion on the relative merits of the two markets has caused the spread between stock and bond sentiment to spike close to a multi-decade high. Over the past 25 years, there haven’t been many times when the Intermediate-term Optimism Index for stocks was more than 50% higher than the Bond Optimism Index.”
“As for whether such a wide disparity in sentiment makes any difference, the table below shows S&P 500 returns after the spread between the two optimism indices reached 50%. And for the S&P, it was a short-term headwind. Its returns were particularly poor over the following month, with only two winners and five losers. However, only the signal during the post-dotcom bubble resulted in a sustained decline.” – Sentiment Trader
We see the same warning of investor exuberance by looking at the stock/bond ratio. The following chart compares the 52-day rate of change between the (SPY) and the iShares 20+ Year Treasury Bond ETF (NASDAQ: ). The vertical lines correspond with both high levels of the stock/bond ratio rate of change and the Relative Strength Index of the .
Unsurprisingly, high levels of investor exuberance in stocks versus bonds have preceded either short-term pullbacks or larger corrections.
High levels of Investor exuberance increase correction risks because markets are more fragile when built on sentiment rather than fundamentals. As the enthusiasm fades, a small negative event, like disappointing earnings, geopolitical tensions, or concerning economic reports, can trigger a reversal between buyers and sellers.
When markets are propped up by speculative exuberance, corrections tend to be more severe. The recent “Yen Carry Trade” blow-up shows that a sudden, unexpected, exogenous shock caused a sharp fall in asset prices. The problem with an exuberant market is that price declines create a feedback loop that accelerates the decline. Historical data confirms that pattern, where market exuberance, fueled by liquidity and investor mania, typically ends in rapid, painful corrections.
A Word of Caution: Timing Is Unpredictable
While investor exuberance sets the stage for corrections, predicting the exact timing is difficult. Alan Greenspan’s famous “irrational exuberance” speech in 1996 came three years before the dot-com peak. Markets can remain euphoric longer than expected, but corrections are inevitable as valuations eventually revert to more sustainable levels, as shown in the chart below.
However, as noted, timing is critical. Investors always make two primary mistakes when investing in an exuberant market. The first is overreacting to signals, believing a more severe correction is coming. The second is taking action too soon. Therefore, we must continue to navigate the market within the context of the current bullish trend.
As Sentiment Trader concluded:
“Sentiment and momentum are often in direct opposition. Just when things are looking best for trend-following momentum chasers, it looks the most at-risk for contrarian-minded investors. We’re reaching one of those times now, as momentum is impressive and compelling. There is little to no evidence that the gas has run out, as breadth remains robust and sector performance is supremely healthy. Extremes in sentiment tend to work better when there is less buying interest underlying the indexes. If we saw more divergences with breadth metrics, the extreme disparity in stock-bond sentiment would have more meaning. As it stands, it’s probably most useful as an early heads-up that conditions are ripe for disappointment, and we should be on guard for any signs of a buying strike in the weeks ahead.”
Practical Takeaways for Investors
Given the signs of elevated exuberance today, investors should consider the following strategies to manage risk:
Rebalance Portfolios : Shift allocations toward defensive sectors or cash to reduce exposure to speculative assets.
: Shift allocations toward defensive sectors or cash to reduce exposure to speculative assets. Limit Leverage : Avoid excessive use of margin to minimize forced selling risks.
: Avoid excessive use of margin to minimize forced selling risks. Monitor Indicators : Pay attention to the technicals, positioning changes, and fund flows for early warning signs.
: Pay attention to the technicals, positioning changes, and fund flows for early warning signs. Consider Bonds: If bonds are out of favor as stock demand increases, a rotational “safety trade” is likely when volatility arises.
In summary, while optimism plays a role in market growth, unchecked exuberance often leads to corrections as markets adjust to reality. By recognizing the signs of market excess and managing risks proactively, investors can better navigate these uncertain periods and protect their portfolios from excessive drawdowns.
Source: https://finance.yahoo.com/video/theres-little-irrational-exuberance-markets-120052077.html