For most of the past couple of years the best argument that American stocks were not in a bubble was that things simply didn’t feel manic enough. Yes, prices had soared, and yes, valuations had risen so high that shareholders’ expected future returns were looking increasingly disappointing.
Yes, the odds of unexpected returns were receding as well, with more or less everyone already convinced that corporate earnings would keep rocketing up while artificial intelligence revolutionised the economy.
But a proper bubble needs more. It is not enough for investors merely to book tomorrow’s profits today. Share prices really come unstuck from reality only after a mania takes hold. Then comes the grim doggedness of revellers who know the next morning’s hangover will be dreadful and are determined to put it off for as long as possible. Then, when it no longer is, comes the crash.
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Has the manic phase now arrived? Imagine telling a time-traveller from a decade ago that on June 11th SpaceX sold shares which valued it at $US1.8 trillion ($2.5t), over 90 times its annual revenue. Mad? No — a fantastic deal for buyers, since the rocketry firm’s bankers reportedly told them it would increase its AI arm’s sales by a factor of 100 by 2030, to $US322 billion.
Why the focus on revenue rather than the conventional way of valuing a company, relative to profits? Because SpaceX doesn’t make any; last year it lost $US5b. Three trading days after its listing its share price had risen by nearly 60 per cent, valuing it at $US2.8t. In the meantime it agreed to pay $US60b for Cursor, an AI-coding darling.
Some might argue, not unreasonably, that this is down to the seeming ability of Elon Musk, SpaceX’s founder, to distort both financial markets and reality. But investors’ euphoria extends far beyond the world’s first trillionaire. American shares, proxied by the S&P 500 index, are only a hair less expensive relative to long-run earnings than they were even at the peak of the dotcom bubble in 2000. This week prices popped again after President Donald Trump at last really did seem to strike a peace deal with Iran.
For the clearest demonstration of investors’ manic mood, look beyond the stock market to the trade in options. These are often described as insurance contracts: a simple “put” option, for instance, confers the right but not the obligation to sell a stock for a set “strike” price on an expiry date. This allows an investor to own the stock while limiting losses should prices crash — in return for paying to buy the option in the first place.
Today, however, much of the options market is better understood as a casino in which punters gamble on stock prices. Another way of describing a put option, after all, is as a bet that on its expiry date the underlying stock’s market price will be below the strike.
If it is, you can buy the stock at the market price, sell it for the (higher) strike and pocket the difference. Otherwise, you let the option expire worthless and lose whatever you paid for it. Conversely, a “call” option, which confers the right to buy rather than sell a stock, is a bet on prices going up.
Trading in stock options has boomed. Volumes recorded in 2025 by OCC, a big American clearing house, were nearly double those in 2020, itself a blow-out year. In 2026 they are on course to be higher still. And trading in ultra-short contracts, which are great for gambling but almost useless as insurance, has expanded even faster. CME Group, a derivatives exchange, reckons that transactions for options on the S&P 500 index that expired on the same day were 3.7 times higher in 2025 than in 2021.
In spite of all this, the insurance function of options still ought to mean that puts are more in demand than calls. Few institutional investors need to insure themselves against a sudden jump in prices; lots (imagine a university endowment) need protection against crashes.
What is more, markets tend to rise slowly but plunge quickly, making puts more valuable than equivalent calls. And the institutions seeking such insurance are generally far bigger than the speculators looking for a quick flutter, and thus move the market more.
So it is remarkable that the average call option for stocks in the tech-heavy NASDAQ index is now almost as expensive as the average put. It means the casino crowd is trading so furiously that its activity outweighs that of the much larger insurance buyers — and it is betting that prices will go to the Moon, or Mars.
The party is entering the phase where things get out of hand. It might stay there for a while. But the longer the hangover is put off, the more it will hurt.
