Throughout financial history, bubbles have inflated around everything from tulip bulbs in 17th-century Holland to dot-com stocks in the late 1990s, the U.S. housing market in the 2000s, and even cryptocurrency in the early 2020s. These episodes share a familiar pattern of asset prices detaching from economic fundamentals and soar into unsustainable territory, only to crash back down when reality sets in. 

Today, concerns about bubbles persist across markets like tech stocks, artificial intelligence–related equities, and even debt markets. Leaders from institutions such as the World Economic Forum have recently warned about potential bubbles in areas like cryptocurrencies, AI, and debt, underscoring that extreme optimism can coexist with risk below the surface.  

What Exactly Is a Bubble? 

A market bubble forms when asset prices rise far above their intrinsic value driven not by fundamentals like earnings or cash flows, but by speculation and collective enthusiasm. In these conditions, investors begin to buy simply because prices are rising, not because the underlying value justifies those prices.  

Common Bubble Traits 

• Rapid Price Increases – Bubbles often feature sharp, sustained price appreciation detached from economic or business fundamentals.  

• Excessive Speculation – Investors chase returns instead of valuation, driven by fear of missing out (FOMO).  

• Overvaluation Relative to Fundamentals – Metrics such as price-to-earnings (P/E) or cyclically adjusted price-to-earnings (CAPE) ratios can soar above historical norms.  

• Over-Ownership and Hype – Retail investors flock to “hot” sectors, sometimes irrespective of profits or long-term prospects. 

• Heavy Leverage – Borrowed money used to buy assets can amplify price movements and make downturns more severe. 

Notably, even seasoned investors struggle to identify bubbles in real time. They often look obvious only after they burst, going up slowly and then collapsing fast.  

1. Persistent Over valuation Isn’t Normal, Compare Prices to Fundamentals 

One of the most concrete ways to gauge whether markets are overextended is by comparing prices with economic or corporate fundamentals. 

Market Valuation Metrics to Watch 

• Buffett Indicator (Market Cap-to-GDP Ratio): This broad valuation measure (total market value relative to national GDP) gives a sense of how much optimism is priced into equities. Historically, readings considerably above long-term averages have correlated with overheated markets. 

• CAPE Ratio: The Shiller CAPE smooths earnings over several years and can highlight valuation extremes. High CAPE levels have historically preceded long market downturns. 

In 2025, the Buffett Indicator reached historically high levels, well above peaks seen during the dot-com bubble and other prior extremes, signaling valuations may be stretched beyond sustainable levels.  

Why This Matters 

Valuations detached from fundamentals signal that prices are being driven more by sentiment than by reality. While stretched multiples don’t guarantee a crash tomorrow, they do suggest risk is elevated and the market is less resilient to negative news. 

2. Speculative Behavior and Sentiment Can Precede Inflections

As much as Bubbles are about valuations, they’re also about psychology. When enthusiasm becomes pervasive and speculative behavior takes hold, warning signs emerge. 

Sentiment and Participation Indicators 

• Retail Herding: A surge in participation from inexperienced retail investors, especially in speculative assets or sectors, can hint at exuberance. 

• Concentration in “Hot” Stocks: When a handful of companies or sectors begin to dominate market performance and speculation spreads from them into unrelated areas, it suggests a risk of broad speculative spillover. 

• Exuberant Valuations in Loss-Making Firms: Companies trading at eye-popping multiples despite lacking profits may indicate investors are prioritizing hype over fundamentals.  

Investor sentiment can also be tracked through metrics such as the Fear & Greed Index or investor surveys, which reveal broad emotional biases that often peak before price tops. 

3. Watch for Rapid Credit Growth and Easy Money Conditions

Bubbles often form in environments with cheap and abundant credit, because easy access to financing allows more investors to buy assets, pushing prices higher. 

Credit and Leverage Signals 

• Rising Margin Debt: When investors increasingly borrow to finance speculative positions, this amplifies both upside and downside  and a leveraged market can unwind abruptly. 

• Credit Expansion Indicators: Rapid growth in consumer or corporate debt linked to asset purchases can highlight rising systemic risk. 

• Persistently Low Interest Rates: Extended periods of low rates encourage risk-taking, but when monetary policy tightens, highly leveraged positions can quickly become untenable.  

These conditions reduce the price discipline that tethered valuations to economic reality, allowing bubbles to inflate further. 

4. Broad Market Participation and FOMO

As a bubble builds, fear of missing out or FOMO becomes more pronounced. Individual investors begin chasing returns, bidding up asset prices simply because others are making money. 

Gamified trading platforms and accessible markets have made this easier than ever, allowing inexperienced investors to pile into sectors with little regard for fundamentals. When momentum replaces careful analysis, it’s often a sign that markets are driven more by emotion than value. 

This behavior was evident in historical bubbles from tulip mania to dot-com stocks and more recently in the rapid rise and collapse of cryptocurrencies where social narratives and hype fueled collective over enthusiasm long before prices peaked. 

5. Technical Signals and Market Structure Changes

In addition to valuation and sentiment indicators, some technical patterns can offer clues that markets are entering a fragile phase. 

Examples of Technical Indicators 

• Price Acceleration and Volume Spikes: Bubbling markets often show not just rising prices, but accelerating gains with increasing trading volume. 

• Diverging Momentum Indicators: Tools like the Relative Strength Index (RSI) can show when momentum is weakening even as prices climb a potential precursor to reversal. 

• Volatility Clues: While bubbles can inflate quietly, prolonged periods of low volatility in the face of rising prices sometimes suggest complacency historically seen before corrections. 

These signals aren’t foolproof, but when combined with valuation and sentiment data, they can strengthen the case that markets are stretched. 

6. Policy and Economic Shifts Can Trigger Bubble Bursts

Market bubbles don’t deflate on their own. They often burst when external constraints appear most commonly when monetary policy tightens, credit conditions tighten, or economic growth slows. 

The Federal Reserve’s actions on interest rates, credit tightening, or shifts in fiscal policy can change liquidity dynamics abruptly, forcing investors to reassess risk and adjust valuations. A historically extended bubble can finally invert as borrowing costs rise and future earnings expectations reset. 

This interaction between policy and markets was a major factor in both the dot-com and housing bubbles, and remains central to how today’s markets may correct. 

We believe the information in this material is reliable, but we cannot guarantee its accuracy or completeness. The opinions, estimates, and strategies shared reflect the author’s judgment based on current market conditions and may change without notice.

The views and strategies shared in this material represent the author’s personal judgment and may differ from those of other contributors at IntriguePages. This content does not constitute official IntriguePages research and should not be interpreted as such. Before making any financial decisions, carefully consider your personal goals and circumstances. For personalized guidance, please consult a qualified financial advisor.