Markets are at highs despite oil shocks, war risk, and Fed uncertainty. Is this irrational exuberance–or rational optimism?
KEY TAKEAWAYS
Markets are reaching or nearing all-time highs despite serious macro risks, including oil above $110, the Strait of Hormuz disruption, and weak odds of a near-term peace deal. That tension is what makes the rally feel so hard to explain.
Alan Greenspan’s 1996 “irrational exuberance” warning is a useful parallel because he was directionally right but painfully early. The Nasdaq kept rising for years before the bubble finally broke.
The current rally is not purely speculative because Q1 earnings have been strong. With 28% of S&P 500 companies reporting, 84% have beaten estimates and earnings surprises have been meaningful.
Megacap tech earnings are the biggest test this week. Microsoft, Alphabet, Amazon, Meta, and Apple need to justify enormous AI infrastructure spending with credible growth and guidance.
The real risk is not that AI is fake or that today’s market leaders are weak. The risk is that valuations are pricing in a perfect future, and perfect futures rarely arrive exactly on schedule.
MY HOT TAKES
The market is not irrational; it is optimistic. That distinction matters because optimism can be supported by fundamentals until the moment those fundamentals stop being enough.
Selling everything because a market looks expensive is usually a losing strategy. Greenspan’s warning came years before the real collapse, and investors who exited early missed enormous gains.
AI infrastructure may be real and transformative, but the return on spending still has to show up. Massive capex with thin near-term revenue contribution creates a narrow margin for disappointment.
The dot-com comparison is useful but imperfect. Today’s dominant companies have real revenue, real cash flow, and real moats, unlike many of the speculative names from the late 1990s.
The signal is not headline earnings beats. The signal is free cash flow, guidance language, AI capex discipline, and whether peace probabilities begin to ease oil-driven inflation pressure.
You can quote me: “That is the most dangerous thing about irrational exuberance–it doesn't feel irrational while you're in it.”
Irrationally rational. What am I missing? How many times have you asked yourself that question over the past few weeks. You don’t have to look too far to see the wall of “challenges” we are facing lately. No matter how you spin it, it is hard to imagine that there will not be some potentially negative impacts on your wallet and ultimately, the market–also your wallet. Never mind “the war,” the Strait is closed. The Strait will remain closed or choked for at least another 6 months based on the latest intel–a best case scenario. That best case assumes, a lasting peace agreement is signed within days, the shooting stops, and mine sweepers can get to work. Oh, this best case also assumes that no rogue entity–sanctioned or otherwise–decides to launch one of their deadly hobby drones. It won’t take much to grind any traffic to a halt. Ok, I am going to be positive and assume that this all gets worked out, but to be fair, it might be a stretch. According to prediction market Polymarket the probability of a permanent peace deal by the end of this month is 3%. Those odds go up to 35% by mid May. In both cases, those are pretty skinny odds by Wall Street Standards. So, best case, pain at the pump will last 6 more months, pain at the Grocery probably starting this summer and lasting until Christmas. That’s the best I got for you, my friends. So–and I get this question from readers and viewers often these days–why %#*& is the market at all-time highs?
It is the rally that no one can explain. You know what? I got a guy. I got a guy who I think might give us a quick take on it. My guy is none other than Alan Greenspan! Remember him? He was the 13th Chairman of the Federal Reserve where he presided over the powerful nerd-bankers from 1987 through 2006. That means he saw a lot of 💩 go down–namely high inflation, high interest rates, and–of course–the bursting of the DotCom bubble.
On December 5th, 1996, Federal Reserve Chairman Alan Greenspan stepped to a podium at the American Enterprise Institute and asked a simple question: "How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions?" There it is--the birth of irrational exuberance! Asian markets sold off 3% the next morning. Those words have become synonymous with rising market valuations that cannot easily be explained. Is this market move to new highs-- with a paralyzed Fed and war-inflation as backdrop--irrational? Let's have a look and see if we can't answer that question.
Here is the punchline on Greenspan's famous warning. Wall Street heard it, processed it, shrugged, and then ran the Nasdaq up three times higher over the next three years. That is the part of the story that many forget and no one really really reports on. 😉 By the end of 1999, the inflation-adjusted Nasdaq was sitting at roughly three times the level it was when Greenspan dropped his bombshell! The man was right. He was just…er, four years early. And anyone who listened to him in 1996 and sold, missed every single point of that rally. That is the most dangerous thing about irrational exuberance–it doesn't feel irrational while you're in it.
So let's bring this home to today, because the parallel is almost uncomfortably close. The S&P 500 is on track for its best month since 2020. The Nasdaq has surged roughly 15% in April alone. Markets are sitting at or near all-time highs. And this is happening while oil trades above $110 a barrel, the Strait of Hormuz is effectively closed, prediction markets are pricing a 3% chance of peace by month end, and we have a Federal Reserve in transition with a new chair waiting in the wings. If Greenspan were standing at that same podium today, I suspect he would ask the exact same question–and Wall Street would shrug at him the exact same way.
But here is where I want to be precise with you, because I think lazy analysis does you a disservice. This rally is not entirely without foundation. With 28% of S&P 500 companies having reported Q1 earnings, 84% have beaten estimates, which is well above the 5-year average of 78%. Companies are reporting earnings that are on average 12% above what analysts projected. That is not nothing. Earnings growth is real, it is broad-based, and it is the primary engine behind this move. The market is not purely a casino right now. There are legitimate reasons for optimism if you look at the underlying corporate numbers.
The problem–and this is where the 100-year-old Greenspan himself might want to pick up the phone–is what is coming this week. On Wednesday, four of the five most valuable companies on earth report earnings. Microsoft, Alphabet, Amazon, and Meta together represent roughly a quarter of the entire S&P 500 by market capitalization. Apple follows on Thursday. These five companies have collectively committed to pouring over $630 billion into AI infrastructure this year alone. For reference, that is a number larger than the GDP of most countries. 👀 That spending is supposed to be the justification for the valuations. Wednesday is when the market finds out if the math actually works.
Here is the specific number I want you to keep in your back pocket. Microsoft alone is targeting roughly $25 billion in AI-related revenue this year against nearly $146 billion in AI and cloud capital spending. That is approximately 17 cents of revenue for every dollar spent. Now, I am not saying that is a catastrophe–early infrastructure investment rarely pays back in year one. But I am saying that when the market is priced for perfection and the return on the biggest spending spree in corporate history is 17 cents on the dollar, the margin for disappointment is razor thin. One cautious word–or even a hint of one–from Satya Nadella on Wednesday afternoon and you will see what a very fast market re-rating looks like.
This is the mechanism Greenspan was describing in 1996, even if he could not see the dot-com bubble clearly from where he was standing. It is not that the underlying businesses are fraudulent or the earnings are fabricated. It is that the market prices in a perfect future, and perfect futures have a way of arriving slightly later than advertised, if they arrive at all. <- You can quote me on that! The dot-com companies were not wrong about the internet changing everything. They were wrong about the timeline. The same question hangs over the AI buildout today. Is this a 1996 moment, where Greenspan was right but early, and selling now means missing three more years of gains? Or is it a 1999 moment, where the rally has already run its course and the only question is which morning you wake up to find the music has stopped?
I will tell you what I think the honest answer is. I do not believe we are in a rerun of 1999. The companies reporting this week have real revenue, real earnings, real cash flows, and real competitive moats that the dot-com darlings of that era never possessed. The Nifty Fifty of today is structurally superior to any prior generation of market leaders. What I do believe is that the wall of risk I described at the top–the Strait, the pump, the grocery store, the Fed transition, the AI capex reckoning–means that the gap between where prices are and where fundamentals justify them to be is wider than it has been in some time. That gap does not have to close tomorrow. It might not close for another year. But gaps like this have a habit of closing faster than anyone expects, and usually when something else breaks first.
So what do you do with all of this? You do not panic. You do not sell everything and sit in cash waiting for Greenspan to be vindicated. History tells you that is a losing strategy–he waited four years, and the people who bailed in 1996 looked foolish right up until the morning they did not. What you do is you pay attention to your signals. Watch the free cash flow numbers Wednesday, not just the earnings beats, which are almost guaranteed at this point given how low the bar has been set. Watch the guidance language. Watch what these CEOs say about their AI spending plans for the second half of the year. If they start hedging those capital expenditure commitments, that is your canary. On the energy side, your signal is the Polymarket probability on a peace deal. When that number starts moving meaningfully above 20% on a sustained basis, oil will begin to price in relief and some of the inflation pressure eases. Until then, the macro headwinds are real and they are not fully priced in.
Greenspan asked his question in 1996 and never really answered it. That was intentional. He was a man who understood that markets punish certainty. I will give you a slightly more direct answer. The market is not irrational. It is optimistic. Those are two different things. Optimism can be sustained by fundamentals for a very long time–right up until the moment it cannot. The job is not to call the top. The job is to know what you own, understand the risks that are not yet reflected in the price, and make sure you are positioned to stay in the game when the volatility comes–because it is coming.
YESTERDAY’S MARKETS
Yesterday, the S&P 500 edged up 0.12% to close at a fresh record, while the Nasdaq gained 0.20% to notch its own all-time closing high. The Dow was the odd man out, slipping 0.13% as McDonald's, Walmart, and IBM weighed on the index. Oil climbed roughly 2% as peace talks stalled and Strait of Hormuz traffic remained choked. The session set the stage for what may be the most consequential earnings week of the year, with Microsoft, Alphabet, Amazon, Meta, and Apple all reporting in the next 48 hours.
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FHFA House Price Index (February) is expected to have inched higher by 0.1%, same as January.
Conference Board Consumer Confidence (April) is expected to have slipped to 89.0 from 91.8.
Important earnings today: Hilton Worldwide, Enterprise Products Partners, Kimberly-Clark, GM, American Tower, Sherwin-Williams, Corning, Ares, UPS, JetBlue, Coca-Cola, Sysco, Franklin Resources, Booking Holdings, T-mobile, Mondelez, Enphase Energy, Robinhood, Caesars Entertainment, ONEOK, Visa, Waste Management, and Starbucks.