How Rational Is This Exuberance?
Last month saw the passing of former Fed chairman Alan Greenspan, whose steady hand and calm demeanor helped pilot the country through the tumult of the 1987 market crash, the collapse of Long Term Capital Management in 1998 and the aftermath of 9/11. His critics would say that his support of financial deregulation helped set the stage for the Great Financial Crisis, but it would be a stretch to accuse him of intentionally stoking speculation. Greenspan was, however, a master of intentional obfuscation in his public comments about markets, which is why his most famous comment, in 1996, that markets might be given over to “irrational exuberance,” was so shocking.
Compared to what came later in the dotcom bubble, markets were rather tame in 1996. The S&P 500 returned more than 30% in 1995, and valuations were above normal, but not yet the mania that would come. His description would prove apt but early.
Comparing today’s market to the bull market of the late 1990s has become something of a cliché (and a mark of middle age), but comparisons are understandable, even if they are not perfect, and this one is not. First, if we’re saying this market is irrationally exuberant in the same way that 1996 was, that really means we should all be buying stocks hand over fist because there are three more years of massive gains ahead. Second, we’re certain this is irrational, right? If only there were clear signs of a market top, such as the merger of AOL and Time Warner in 2000. If only there were some high-profile IPOs today that we could point to as danger signs.
So, do Greenspan’s words describe today? Is this market irrationally exuberant? Probably not in the long term, but perhaps a little in the short term.
Exuberance
The second quarter was historically strong, as performance across global equity markets reflected a significant reduction in hostilities in the Iran conflict and also expectations of continued strong earnings growth. The S&P 500 posted its best quarter in six years. Index returns were notable not just for their strength but for their consistency; global stocks returned about 15% during the quarter, with international and domestic shares performing about the same. Domestically, small caps led the market higher, and growth stocks did a little better than value for the quarter, after having been ravaged earlier in the year. Markets softened in June, with the powerful rally in tech fading, while small caps and value names outperformed.
Oil is back to flowing through the Strait of Hormuz at more than 80% of pre-war levels, on pace to re- turn to pre-war levels this month. Ironically, traders have been attempting to handicap the effect of adding millions of barrels of oil to the global supply at once. Brent oil had fallen back to $72, almost exactly where it was before the conflict began, before this week’s volatility. Interest rates rose across the curve during the quarter in response to rising inflation caused by higher fuel prices, but equity markets seem to view this as a temporary condition.
Basically, the market has in large part reverted to where it was prior to the interruption of regularly scheduled programming, where valuations are rich compared to historical levels but with a strong economy underpinning earnings growth, fueled by a secular boom in what has become a large AI ecosystem: the white-hot semiconductor sector and other companies seen to benefit from the AI boom such as memory manufacturers, networking companies and suppliers of data-center infra- structure.
Semiconductors have tripled their share of the S&P 500 since 2022, moving from about 6% of the index to about 18%. These chipmakers, of course, are the primary beneficiaries of the AI boom, as they supply the tiny semiconductors needed to power the ginormous demand for AI computing power. There’s NVIDIA, of course, the most successful designer of these chips, but valuations of companies such as Micron, Intel and Texas Instruments, that were only recently seen as highly cyclical purveyors of commodities, have exploded.
Supercycles
Great secular cyclical booms tend to manifest like this. In the late 1990s, companies supplying the “picks and shovels” of the Internet, such as Cisco, WorldCom, Global Crossing and JDS Uniphase, were some of the market champions of that time. WorldCom and Level 3 Communications spent enormous sums laying the fiber-optic cable for the transformative Internet revolution.
Fast forward to the shale boom, when fracking technology unleashed a massive buildout of U.S. oil and gas supply—companies such as Chesapeake Energy, Pioneer Natural Resources, Devon Energy and Apache Corporation each saw massive increases in valuation as a result of their leadership in the category. Sell-side analysts pronounced each of these booms to be “supercycles”—secular growth stories extrapolated for years.
These environments are unusually vexing for fundamental analysts because the stocks that often outperform during these supercycles are ones that are the least attractive on a fundamental basis. The supercycle narrative bestows substantial short-term success to the most crowded of trades, and the narrative can persist for a long time. However, in the end, the so-called supercycles have a tendency not to last as long as the narrative suggested in the early going. This is how capitalism works, right? A great idea will attract, for a while, virtually unlimited capital. Then, by virtue of the arrival of that same capital, returns on that capital decline. Thus begins the end of the supercycle and the end of the outsized shareholder returns. Bottom line? It’s usually not a great idea to chase the cyclicals.
Semiconductor companies such as Broadcom and Taiwan Semiconductor had been great performers for years, even before the AI boom, so it’s not like the chipmakers had been uninvestable before 2022. However, take Micron, more of a memory manufacturer than a chipmaker. Micron has returned about 250% YTD. Micron was not even in the top 100 most valuable companies in the S&P 500 at the beginning of 2025; now it is just outside the top ten. This is also a stock that has declined in value by 50% or more three times in the last 25 years (and was once down 98% vs. its IPO price). Memory manufacturing is a tough business, with high fixed costs and volatile pricing, not to mention high investor expectations.
What’s been really interesting is that the chipmakers have far outstripped the hyperscalers (Microsoft, Meta, Amazon, et al) in stock price performance. Why is the market rewarding the hardware providers but not the customers of those hardware providers? The companies expected to spend more than $750 billion this year on AI buildout, and close to another $2 trillion over the next two years, are not enjoying the same investor enthusiasm. The market is rewarding the companies earning cash on the barrelhead, but not the ones paying cash (or sometimes stock) for chips, gear and infrastructure that support the compute. The market seems to believe the chipmakers will maintain pricing power, but simultaneously believes that monetizing the benefits from this same infrastructure will be difficult. Of course, if monetization becomes truly difficult, how long can pricing power be maintained?
As Warren Buffett likes to say, perhaps this goes into the “too hard” pile. Or perhaps it’s not that hard. Either way, matching the market’s enthusiasm by chasing the semis at this stage seems like a tough bet to underwrite.
Concentration
Tech, including semiconductors, now represents about half of the total value of the S&P 500. Seven of the top ten companies in the S&P 500 are tech companies; those seven are the top seven (Micro- soft, NVIDIA, Apple, Amazon, Alphabet, Meta Platforms and Broadcom). We have written a lot about the unusual amount of value concentration in the markets, with these companies representing such a large proportion of the total value of the index vs. history. This condition appeared to abate briefly earlier this year amid rising interest rates and fears of an AI bubble, but since the de-escalation of the Iran conflict and strong 2Q earnings, we are right back to where we were—with seven big uglies amid emerging signs of a broadening of earnings growth.
Market concentration has been a risk, but we have been encouraged so far this year by the emerging (and long-awaited) performance of small caps, where we tend to be significantly allocated. Small- cap value indices such as the Russell 2000 have enjoyed excellent performance so far in 2026. The Russell 2000 returned almost 23% through June 30, more than double its large-cap counterpart, the Russell 3000 (10.9%).
We have also been pleased with how the value factor has performed this year. Value stocks, another area where we tend to be conspicuously allocated, have performed well as an asset class. Pricier growth stocks rebounded during the second quarter to make up some of the performance gap but faded somewhat during June.
Spacely Sprockets
June was a milestone month for the market; we saw the largest IPO in history on June 12 when SpaceX went public at $135 per share, raising $75 billion (later raised to $86 billion once underwriters exercised their greenshoe allotments). SpaceX is, of course, the satellite communications and rocket company founded by Elon Musk, who became the world’s first trillionaire by virtue of the offering.
SpaceX is not exactly a value stock; its valuation is, to borrow a term from academia, completely insane by any conventional metric. On the other hand, it has been an extraordinarily efficient user of investor capital to date. Prior to going public, SpaceX had only raised about $10 billion in capital from the venture world since its founding in 2002—it went public at a valuation of almost $2 trillion. This is not a return on capital in the conventional sense of revenue less expenses flowing through the income statement, or even the more liberal earnings before interest, taxes, depreciation and amortization (EBITDA). This is a pure re-rating of an asset in the eyes of investors based on expectations of future growth.
According to its filings, SpaceX recorded 2025 revenues of $18.7 billion. About 60% of that revenue was from Starlink, which is an excellent, high-margin business. So SpaceX went public at a valuation of more than 100 times revenue. For perspective, NVIDIA at its richest valuation was 25-35x revenue. Palantir was 60-70x revenue. Clearly, SpaceX investors could not care less about 2025 revenue— they’re betting the company will win a huge slice of a large total addressable market (global broadband, AI infrastructure, defense, launch services and perhaps moving humanity to Mars). But that’s the bet, and it’s an aggressive one.
How much growth capital does a $2 trillion IPO siphon away from other growth stocks? How much will the eventual OpenAI and Anthropic IPOs hoover up? We do not have any unique insight into the distant-future financial statements of any of these companies, even though they would seem to be relevant at these valuations, but we’re also not taking the position that these companies do not have bright futures. It’s just that this IPO is such a classic sign of market frothiness that it is difficult, no, impossible, to ignore. Of course, there are dozens of sell-side analysts with “Buy” ratings on the stock, including one with an $800 price target. Clearly, that fellow believes we are in the early stages of the AI supercycle.
Koncentration?
There’s another possibility worth considering as it relates to market concentration.
Perhaps today’s concentration isn’t simply the product of enthusiasm surrounding artificial intel- ligence or passive investing. It may also reflect a broader concentration of wealth in the economy itself.
Consider Elon Musk. It’s fascinating to speak with different people about their impression of Elon Musk and the wealth he has created not just for himself but for others. Whatever one thinks about his politics, his record at Tesla or his commitment to human reproduction (14 children with four different women), his business success is obviously undeniable. Many people reflexively think of him as a quirky and perhaps even malevolent trillionaire, and because of his politicalization, he has created some strange bedfellows. However, it has been my experience that the closer one gets to his circle (denizens of Silicon Valley, Stanford MBAs, Sand Hill Road), the more likely one is to find people who admire his success. Certainly, there is appreciation in his orbit for the wealth he has created for some of his investors, but there’s also an appreciation for the process through which this was accomplished. If we are living in a K-shaped economy, some of his biggest fans are in the upper branch.
The concept of the K-shaped economy grew popular in the wake of the pandemic. The idea was that, unlike being a V-shape, the historical representation of an economy coming out of a recession, our economy looked more like a K, with some parts gaining strength and flourishing while other parts were losing strength and falling behind. Generally speaking, skilled workers and asset owners came out of the pandemic in much better shape than others. Despite some recent emergent concerns about the potential threat to white-collar jobs from AI, the last five years have been an extraordinary time to be educated and wealthy, no matter one’s politics.
This phenomenon raises the question: Is our K-shaped economy one reason why the equity market is so concentrated? Sure, the economy is not the market, but they’re certainly related over the long term. As wealth becomes increasingly concentrated, might it make sense that the market mirrors the wealth of the country?
The concentration of wealth in the financial markets and in the economy, healthy or not, seems likely to make the markets more resilient to geopolitical shocks such as the war in Iran. The concentration of market capitalization in highly profitable, capital-light companies means that as long as earnings growth remains strong, the overall markets could shrug off $5 gasoline prices. Meanwhile, in the real economy, someone with a $4 million portfolio up 15% for the quarter is likely not that concerned about what it costs to fill up his Tahoe.
Furthermore, a K-shaped economy might also be contributing to the persistently elevated valuations in the market we’ve been experiencing. As net worths have gone up, consumption as a percentage of net worth has gone down, meaning there are more dollars to spend on assets.
Some market observers are waiting for stock prices to fall, merely due to an expectation of mean reversion, but does anyone think that prices for vacation homes in Kiawah, Figure Eight or Sag Harbor will fall back to historical averages? As one of my upper-K-branch friends likes to say, “That seems like a long putt.”
None of this is an argument that market concentration, or wealth concentration, is necessarily desirable or permanent, but we do acknowledge that structural forces may allow it to persist for a long time. Nonetheless, it is a feature of the market to be managed, and we think the best way is to allocate to the areas of concentration, but to be under indexed to those areas in anticipation of the eventual shift away from those areas as the economics of those businesses evolve and advantages are competed away, and historically this has manifested itself through the growth of smaller companies.
In other words, we’re not making the case that houses on Wrightsville Beach or Sullivan’s Island will become more affordable; we’re betting that Georgetown and Litchfield Beach will be attractive investments, too.
America: A Historically Good Bet
As Americans celebrate the nation’s 250th birthday, we’re reminded that the country’s greatest competitive advantage has rarely been low valuations or perfect economic policy. It has been an extraordinary capacity to innovate, adapt and create wealth over long periods of time.
Consider how far the United States has come in 250 years. In today’s age of ubiquitous social media overwhelming the senses, it has never been easier to not see the forest for the trees. How much richer are we than our forefathers? Today’s living standards would have been beyond the comprehension of Benjamin Franklin’s considerable brain. Since 1776, the life expectancy of Americans has doubled, the population has increased 136x to 340 million from 2.5 million and the economy has grown more than 600x from about $50 billion (in today’s dollars) to $31 trillion. But none of these statistics captures what’s happened to living standards. In 1776, a wealthy American might have owned a few hundred acres of farmland, livestock and perhaps a few pieces of imported furniture and some silverware. Maybe this person might have owned a few books. Yet, this person lacked indoor plumbing, refrigeration, antibiotics and air conditioning. He certainly didn’t have Instagram. Or Uber. Or a Tesla.
Heck, compare today to the great patriotic hootenanny of my childhood, the 200th anniversary in 1976. (For a while, I collected those cool bicentennial quarters, but they eventually had a way of making their way into the nearest Galaga machine.) GDP per capita has doubled from $35,000 to $70,000, and the S&P 500 has gone from 100 to 7500. My dad’s 1976 Ford Country Squire was a technological marvel that could go 0-60 in about 13 seconds and got about 12 miles per gallon. Many people today wouldn’t even let their children ride around the block in a car with lap belts, no airbags and no anti-lock brakes.
Yes, this market feels exuberant. Yes, this market is concentrated. Yes, there are reasons to be cautious about the underlying structure of our economy and about near-term market returns. But the best piece of financial advice you could have offered Benjamin Franklin, who didn’t need much financial advice, would have been to keep doing what he was doing, buying a diversified range of productive assets and let science, discipline and compounding do the rest.
So, exuberant, yes. Irrational? Depends on one’s time frame. Ours is quite long. As always, we thank you for your continued confidence.
Burke Koonce III
Chief Investment Strategist
bkoonce@trustcompanyofthesouth.com
Daniel L. Tolomay, CFA
Chief Investment Officer
dtolomay@trustcompanyofthesouth.com
Disclosures
This communication is for informational purposes only and should not be used for any other purpose, as it does not constitute a recommendation or solicitation of the purchase or sale of any security or of any investment services. Some information referenced in this memo is generated by independent, third parties that are believed but not guaranteed to be reliable. Opinions expressed herein are subject to change without notice. These materials are not intended to be tax or legal advice, and readers are encouraged to consult with their own legal, tax, and investment advisors before implementing any financial strategy.
