The S&P 500 just crossed a record high while a war chokes global oil supplies, household debt surges, and an AI boom echoes 1999. Robert Shiller’s famous warning from three decades ago has never felt more relevant.

“How do we know when irrational exuberance has unduly escalated asset values,” asked the then Chairman of the Federal Reserve, Alan Greenspan in 1996, “which then become subject to unexpected and prolonged contractions?”

The phrase has stuck in the popular imagination. Four years later, Yale economist Robert Shiller published Irrational Exuberance, that argued market booms are not driven primarily by corporate fundamentals. They are driven by investor enthusiasm, herd behaviour and what Shiller called “psychological contagion” – the way bullish narratives spread through a population of investors the way rumours spread through a crowd, gathering momentum and detaching from reality until the moment they don’t.

The book was published in March 2000. The dot-com bubble peaked two months later. The Nasdaq fell 78% over the following two years.

This week, the S&P 500 breached 7,000 for the first time in its history, closing at a record 7,041 on Thursday amid a relief rally driven by hopes that the US-Iran war might be nearing an enduring ceasefire.

What does Nobel Prize winner, Robert Shiller think?

The Number That Should Make Us Nervous

More than a book about irrational exuberance, Schiller built a tool to measure it. The Cyclically Adjusted Price-to-Earnings ratio – the CAPE, or Shiller P/E – divides the current price of the S&P 500 by the average of ten years of inflation-adjusted earnings, smoothing out short-term distortions to give a cleaner read on whether stocks are expensive relative to long-term fundamentals.

The historic average CAPE value for the 20th century was 15.21. In 2014, Shiller himself expressed concern that a prevailing CAPE of over 25 was “a level that has been surpassed since 1881 in only three previous periods: the years clustered around 1929, 1999 and 2007. Major market drops followed those peaks.”

That was at 25. Today, the Shiller CAPE ratio for the S&P 500 stands at approximately 39.8 – 78% above its long-term trendline, currently in the highest quintile of all historical readings, and suggesting, by Shiller’s own framework, a highly overvalued market.

In 2000, the CAPE peaked at around 44, followed by a 49% decline in the S&P 500 and a 78% collapse in the Nasdaq. In 2007, the CAPE peaked at around 37, a level the market is essentially at again today. A 57% decline followed.

These are not predictions. A high CAPE ratio does not cause a crash any more than a high temperature causes an illness. But it is a reliable measure of how much faith investors are placing in the future relative to the evidence of the present. And right now, the evidence of the present is, to put it gently, mixed.

Three Echoes of a Crash We’ve Seen Before

A sharply insightful Bloomberg Opinion piece published this week by labour economist Kathryn Anne Edwards argued that the impulse to compare today’s economy to the 1970s – stagflation, oil shocks, a Fed under pressure – is understandable but ultimately the wrong frame. The more instructive parallel, she contends, is the mid-2000s, in the years before the crash that few saw coming and almost everyone should have.

She identifies three parallels that deserve to be taken seriously.

The first is paltry job and wage growth beneath a deceptively calm unemployment rate. The business cycle from 2001’s dot-com recession to the Great Financial Crisis of 2007-08 was one of the shortest and weakest on record, featuring weak wage growth and the worst job growth ever seen in an expansion. The labour share of income plunged even as the economy was nominally expanding. Today, 2025 had an ignominious distinction: the fewest jobs added in any year outside a recession – just 116,000. The drop in labour’s share of income is parallel. And despite it all, the unemployment rate, though it has risen a point, remains low.

The second is rising consumer debt and delinquency. In the mid-2000s, weak income growth was sustained by easy credit. Total credit card debt climbed to $840 billion by 2007, a level not surpassed in nominal terms until 2019. The share of household debt in delinquency started rising as early as 2005. Today, credit card debt has grown from $810 billion in summer 2020 to $1.2 trillion five years later. At the end of 2025, 4.8% of total household debt was delinquent, on par with what it was at the start of the 2007 recession.

The third and most ominous is a financial bubble whose opacity conceals systemic risk. The stock market is broadly weak but riding on the coattails of AI exuberance and the so-called “Magnificent Seven” technology companies. If AI turns out to be overvalued, a correction will reduce asset values for millions of households. Another concern is private markets which are increasingly intermingled with public markets and have the potential to cause a crash.

That last point is where behavioural finance research becomes most useful. A study by Isik Akin of Bath Spa University and Maryem Akim at Akdenix University, published in Behavioural Public Policy has found that rising consumer confidence tends to positively influence the stock market through herding behaviour and optimism, but that this same dynamic creates vulnerability. When a large number of investors herd into a particular asset class, it leads to price bubbles that deviate significantly from fundamentals. AI is currently the asset class of choice for that kind of momentum-driven crowding.

The War in the Gulf That Markets Have Chosen to Ignore

There is one further element in today’s picture that Shiller’s original analysis could not have anticipated: a geopolitical shock of the first order that the market has essentially decided not to worry about.

Since late February, the US and Israel have been engaged in an air war with Iran. The Strait of Hormuz, a seaway just 34 kilometres wide at its narrowest point has been largely blocked since 28 February 2026, when Iran’s Revolutionary Guard issued warnings forbidding passage and launched 21 confirmed attacks on merchant ships. Before the war, around 20 million barrels of oil transited the strait every day, representing roughly 20% of the world’s seaborne oil trade.

The price of West Texas Intermediate crude is up 60% since the start of 2026. That means American consumers are facing higher prices not only at the gas pump but for practically every product that travels on a boat, plane, or truck. And yet, on optimism that a peace deal might be imminent, the market has raced to all-time highs.

The enthusiasm in the stock market may not reflect people’s everyday experience in the economy. While stocks have recouped losses, US gas and diesel prices remain elevated, straining Americans’ budgets. Jamie Dimon of JPMorgan, rarely a shrinking violet on risk, has warned that inflation may not be fully under control and that a resurgence – “the skunk at the party,” as he put it – driven by energy shocks could force interest rates higher again and pressure stocks, bonds and real estate simultaneously.

This is the kind of divergence between market sentiment and economic reality that Shiller’s framework was built to identify. A V-shaped recovery in equities during an active war involving the world’s most critical oil chokepoint is not necessarily a sign that investors have access to information the rest of us lack. It may be a sign that they are doing what investors have always done when sentiment is running hot: extrapolating optimism and discounting risk.

What Business Schools Are Watching

The academic field of behavioural finance, which Shiller helped to popularise alongside Daniel Kahneman, whose work on cognitive biases and prospect theory laid its psychological foundations, has grown substantially since Irrational Exuberance was published. A 2025 paper in the Advances in Consumer Research journal put it directly: systematic psychological biases, including herd behaviour, loss aversion, overconfidence, and representativeness drive collective investor sentiment away from rationality, leading to asset mispricing and amplified market swings. Traditional financial theory, anchored in the Efficient Market Hypothesis, consistently fails to explain the extreme market volatility observed during crisis scenarios.

The practical implication for investors and business leaders is uncomfortable. Markets at record highs, driven largely by a concentrated set of technology stocks trading at elevated multiples, against a backdrop of consumer debt stress, energy price inflation, an unresolved geopolitical conflict and a federal deficit that reached $1.7 trillion last year, with the balance sheet looking like the end of a recession rather than the start of one, do not represent a consensus of cool-headed analysis. They represent a collective bet, by millions of individual participants all watching each other, that the music will keep playing.

It always does, until it doesn’t.

The Question Greenspan Asked

Thirty years ago, Alan Greenspan’s question was rhetorical. He didn’t know how to identify irrational exuberance in real time. Neither did anyone else.

Shiller gave us tools – the CAPE ratio, the attention to narrative, the study of how investor psychology transmits through a market like a contagion – but he was always careful not to claim they enabled precise prediction. What they enable is a scepticism about whether the price of risk matches its actual magnitude.

Barclays Private Bank, in its outlook for 2026, noted that all-time highs don’t necessarily mean a pullback is imminent.Markets have spent about 30% of the time since 1990 at all-time highs. But they also noted that a high starting valuation typically leads to lower returns over time, and that with equity indices unusually dependent on a few large companies, this amplifies sensitivity to stock-specific news and heightens the risk of index-level volatility if those leaders de-rate.

With the S&P 500 above 7,000, the Greenspan question is how do we know when irrational exuberance has unduly escalated asset values?

We never know for certain. But the CAPE ratio at 39.8, household debt delinquency rising to 2007 levels, AI capex commitments running into the hundreds of billions on revenues that don’t yet justify them, and the world’s most important oil transit route recently under active military blockade are not the footnotes of a market rationally pricing in a golden age.

They are the conditions that Shiller has spent his career warning us to notice.

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