“Fundamentals have taken a back seat again as stocks with hot narratives are trading like lottery tickets,” said Dave Mazza, chief executive officer of Roundhill Investments.
He points out sentiment gauges like relative strength readings and valuation multiples are once again looking extended. “That sets the stage for a sharp air-pocket on the next bad headline.”
Animal spirits have been revived on optimism that the US is making progress on reaching trade deals with key partners — or that president Donald Trump will at least postpone his July 9 tariff deadline.
There’s also speculation the US Fed will cut interest rates.
The upshot is that stocks set a record high on Friday for the first time since February.
Barclays sees abundant signs of froth, with listings of new blank-check companies in 2025 already surpassing the last two years combined.
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Meanwhile, Cathie Wood’s ARK Innovation ETF (ARKK) — a proxy for profitless technology firms — posted one of its best rallies in history, second only to the post-Covid surge.
In the second quarter, Bitcoin-linked firms rallied 78%, while quantum computing shares climbed 69% and meme stocks advanced 44% — all volatile corners where investors are betting on future returns that may not materialise.
A basket of highly shorted securities rallied 29%.
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“Elevated readings of the indicator suggest that investors may be overly exuberant, which could lead to increased market volatility,” said Stefano Pascale, head of US equity derivatives strategy at Barclays.
Pascale described the exuberance measure, which the firm dubs its Equity Euphoria Indicator, as measuring the proportion of euphoric stocks within a universe of US equities that have liquid options.
It correlates with other popular metrics that measure retail investing, such as the net debit position of margin accounts, which shows the amount of borrowed money for a trade.
Despite elevated levels, Pascale argues that bubbles are difficult to time and can expand for extended periods before correcting.
As such, he recommends riding the wave for now and hedging with options to curb potential losses if things go awry.
