Stock Market Euphoria Reaches Levels Not Seen Since Tech Bubble, Warns Barclays
Investors are urged to exercise caution as the stock market’s “animal spirits” have reached levels not seen since the dot-com bubble, according to Barclays’ new Equity Euphoria Indicator.
The indicator, which tracks the breadth and strength of “animal spirits” among stocks using derivatives flow insights, has reached its highest level since the dot-com era. The current reading is a cause for concern, as it suggests that investors are getting overly exuberant, potentially setting the stage for increased market volatility.
The equity indicator has only reached this level less than 20% of the time, and during times of high market stress, it has often signaled that the market is due for a correction. The recent run in markets has triggered the indicator, which suggests that investors are getting caught up in a sense of euphoria, leading them to overlook potential risks.
While pro-growth policies, including the next step in the AI cycle, deregulation, and potential tax and rate cuts, could drive markets higher, inflationary pressures from tariffs, immigration policies, and fiscal risks could create headwinds. Additionally, extreme positioning in markets adds to the potential for wild swings, with the consensus firmly behind a bullish view towards U.S. equities and disdain for Europe, creating the potential for exacerbated volatility during market stress.